High-Innovation SP500 Meets "August Curse"! Summer's Calm Before the Storm, Wall Street Calls for "Counter-Attacking Time"
Fundstrat Global Advisors' technical strategy manager has found that US stocks often peak in mid-August and then experience a sharp correction. Meanwhile, the yield on 10-year Treasury notes is rising, which may cast a shadow over the market's outlook.
According to Niten Sakesena, the head of research at American Bank's Americas Equities Derivatives Research team, August often sees a surge in volatility due to seasonality. He recalled three instances of sharp corrections in August since 2011 that caused massive selloffs.
Data from Deutsche Bank shows that commodity trading advisors (CTAs) currently hold a whopping 94% long position on stocks, the highest level since January 2020. This not only reflects their confidence in the market but also increases the risk of sudden reversals if the environment changes.
To counter this selling pressure, Sakesena's team recommends adopting what they call the "W-shaped trading" strategy. First, sell off derivative products or other investment tools that can generate profits when the market remains calm, then use the proceeds to pay for larger bets on stocks in case of sudden surges or downturns. Given the low cost of hedging currently, this is a good time for investors to adopt counter-strategies.
So far, Wall Street has been long-term bullish on US stocks, driven by expectations of a soft landing for the economy and strong earnings from tech companies. However, there are also concerns about valuations being stretched and trade negotiations remaining uncertain.
Stifel's chief stock strategist Barry Bannister warned investors not to get too confident in the current rally, as the S&P 500 index is near historical highs, and US economic growth may slow significantly. He predicts that the market may experience a sharp correction by the end of next year.
Of course, there are other ways to hedge against extreme volatility risks. Matthew Thompson, the portfolio manager at Little Harbor Advisors, manages two ETFs that seek to outperform the S&P 500 and Nasdaq-100 indices through trading derivatives during market turbulence.
Last August, when the yen carry trade was suddenly reversed due to Japanese central bank rate hikes and the activation of "Sam's Rule," which fueled expectations of a US economic downturn, VIX surged to its highest level since the COVID-19 pandemic. This strategy generated strong returns for Thompson's ETF products at the time.
However, investors and traders should note that markets tend to mean-revert - although such market shocks may be unavoidable, they often last only a short period of time.
"We're looking for those rare events where defensive strategies can generate huge profits and help with returns," Thompson said in an interview. "It's not about being nervous all the time and covering everything."