Extreme Behavior Is on Display Everywhere in the Stock Market

It took 33 days for stocks to drop 34%, and three weeks to gain half of it back. Whiplashed investors have been thankful for a dose of calm, but signs are emerging the lull may not last.

The clues are evident across options markets, in surging share volume and in widening daily price swings, among other places. Frantic positioning and extreme readings in market internals show that while the S&P 500 has been nestled in a trading range for four weeks, investors remain anything but settled.

“Volatility is picking up,” said Matt Forester, chief investment officer of BNY Mellon’s Lockwood Advisors. “More volatility than what we’ve seen over the past couple months is probably in order for the market. There is a real tug of war from what we expect from policy makers and some of the dire fundamentals.”

The S&P 500 sank 1.1% Tuesday, turning sharply lower after a report questioned promising results in a virus vaccine study. The increased prospect for a way to battle the pandemic had sparked a 3.2% rally Monday.

Small But Aggressive

Tiny investors are historically bullish. Last week, the smallest of options traders (those who trade 10 contracts or fewer at a time) positioned themselves to bet on a rally, buying bullish calls and selling bearish puts at a record pace, according to Sundial Capital Research.

“When we look at a group of traders who tend to be wrong at emotional extremes, the warning sign is clear,” said Jason Goepfert, the president of Sundial. “There is no data we follow that is more worrying than this.”

Waning Hedging

A broader view of options trading shows all types of investors reconsidering protection. The Cboe put-to-call ratio for stocks, which tracks volume in bearish versus bullish bets, fell Monday to the lowest level since Feb. 19 -- the day the S&P 500 last hit a record before falling into the fastest bear market of all-time.