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Although the recent move in US stocks almost resulted in sellers opting to exit the market, it is not correct to say that the bullish mood is completely widespread. And since the once abandoned options trading is back, investors should take caution to avoid losing profit.
The rally last Friday showed that while new stocks were rising thanks to positive data on US employment, retail investors were losing their taste for trading amid the spread of the delta variant. As a result, funds were hedging, not to mention the Federal Reserve is reportedly pondering a pullback in monetary stimulus.
Maneesh Deshpande, managing director at Barclays, said investors are nervously stretching the market right now because they see that further capital growth will be limited.
This idea is further proved by the fluctuation in the S&P 500, which continued the series of alternating gains and losses that began early last month. During this time, defensive stocks such as electric power jumped to the top of the list of market leaders, while energy, the favorite of cyclical trading in 2021, took the last place.
Traders using buy and sell tactics have come under fire in recent years as a rally in stocks has led to a decline in stock options.
The strategy works best during periods of increased volatility, when options are more expensive. Market participants say this is most likely the current scenario, especially since analysts surveyed by Bloomberg said the average year-end target for the S&P 500 is 4.242 points, implying a 4% decline by December. And even though at least four of the analysts raised their forecasts since then, the updates have come with a warning: be prepared for high volatility.
For example, David Kostin of Goldman Sachs said the index will hit 4.700, but warned that the path will not be smooth as uncertainty about fiscal and monetary policy is likely to create volatility.
Meanwhile, retailers, who were among the first to support crashed airlines and cruise owners during the pandemic, are now holding back optimism amid a sharp increase in the number of delta cases. According to a report from Vanda Research, purchases of newly opened shares have decreased by half over the past two weeks, as investors are buying shares of vaccine manufacturers and those who meet demand at home.
Macro headwinds aside, the graph seems ominous. The S&P 500 has avoided a 5% decline in 190 days, which hints that stability may continue. All in all, the index is up by 46% year-on-year since early November.
"We typically see one or two 5% retracements every year, even during a bull market. If things go even faster than they have in the past, I expect to see such a move soon," Chris Murphy, strategist at Susquehanna, said.
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