Considerable attention has been focused upon the proliferation of zero-day-to expiration options. As noted the other day, the CBOE states retail traders—defined as trading 10 options contracts or less—now represent the majority of S & P 500 options, often exceeding half of the total trading in the S & P 500 itself. Call volume greatly exceeds put volumes.
This retail trading drives large spikes in volumes that is affecting the price behavior of the S & P 500 according to the CBOE.
The CBOE further stated that the markets’ underpinnings are more fragile than currently believed. Some pundits have used the term “marshmallow” or “Jello” to describe the undergirding.
Defensive issues of the S & P 500, defined as energy, utilities, healthcare and staples, now comprise 21% of the S & P 500 capitalization, the lowest percentage in 35 years according to Bloomberg. The last time the defensive issues were this undervalued as compared to the S & P 500 was 2000, right before the S & P 500 went into “the mother” of all rotations for the next 10 years.
The S & P 500 is trading around 22x times earnings, and it is hard to see how multiples expand much more from here given the structural issues the economy is facing (interest rates, tariffs, margin compression, etc).
Potentially this is a major contrarian indicator, an indicator that is perhaps amplified by the massive amount of monies in one sector and a handful of stocks.
Speaking of the mother of all rotations, will the US use the Mother of all Bombs (MOAB) in Iran. The US first used MOAB in 2017 against the Taliban with great success. It annihilated mountain cave encampments that some believed were impenetrable. Current polling suggests 80% support for such action according to Senator John Fetterman.
Writing the obvious, the outcome of the US becoming directly involved is perhaps unquantifiable. Will this be a catalyst for the inevitable rotation that should occur based upon all market rationality?
Speaking of catalysts, the outcome of the FOMC meeting was largely as expected. The Fed voted unanimously to hold rates unchanged for a fourth consecutive meeting. Officials are still pricing in two rate cuts this year. The uncertainty about the outlook has diminished but is still elevated.
The Fed lowers 2025 GDP estimates to 1.4% from 1.7% and lifts inflation to 3% from 2.7%. Unemployment is expected to be around 4.5%, almost unchanged from previous estimates.
While the median expectation for two rate cuts in 2025 did not change, a number of officials lowered their projections. Seven officials now foresee no rate cuts this year, compared with four in March. Two others pointed to one cut this year.
Perhaps to the surprise of many, there was no mention of tariffs, tax, oil or deficit in the statement.
Treasuries were relatively unmoved by the outcome; equities were rather sanguine.
Last night the foreign markets were up. London was up 0.44%, Paris up 0.65% and Frankfurt up 1.15%.. China was down 0.07%, Japan off 0.22% and Hang Seng up 1.26%.
Futures are flat in a nervous geopolitical environment, The 10-year is 0ff 7/32 to yield 4.42%.
