FX Evolution: The World’s Biggest Stock Market Hedge Has Mean Reverted!

Markets can be tough to figure out. Sometimes, good news is good news – leading to higher prices. At other times, bad news can be good news.

For instance, bad news about the economy slowing down may entice policymakers to stop raising interest rates. That could lead to stocks moving higher. And when such news pops up, so too do stocks in anticipation of such a move, even if no actual change happens.

How can investors best trade such a market where changes in expectations can lead to big moves?

One way is by looking at market hedges. With investors looking discouraged right now, prices may have fallen too quickly. That can lead to a fast rebound in the stock market.

There are plenty of ways to look at how markets are being hedged. Over the past few years, trading with options has exploded. And right now, options traders are paying a considerable amount for market protection.

In fact, the only time this measure has been higher has been in October 2008, right as markets were melting down during the financial crisis. It’s tied for the peak of the Covid selloff in early 2020, right before stocks soared.

That could be a sign that markets may have a stronger bounce ahead, but we likely won’t feel like we’re in a bull market for several months to come.

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