US equity indices have had massive gains in the past four months. In the options market, calls heavily outweigh puts – to a point where it is beginning to look dangerously lop-sided. If past is prologue, during such times it pays to take out the caution hat.
The rally since the March lows has produced phenomenal gains for the longs. Through yesterday’s intraday high, the S&P 500 large cap index was up 49.5 percent. Through last week’s high, the Nasdaq 100 index surged 63.5 percent, and the Russell 2000 small cap index jumped 59.1 percent through its high early June.
These are out-of-this-world gains in as short a time as four months! A lot of the time, it can act as a self-fulfilling prophecy. What is transpiring in the options market is an example. For several weeks now, it has paid to be greedy, which encourages more risk-taking activity. Greed begets more greed – so to speak – until gravity rules and momentum reverses.
Risks are elevated, to a point where things are looking frothy.