Bears Go Nuclear With $8B Bet The Market Will Decline — 3x What They Thought in 2008

The S&P 500 closed up 0.66% on Thursday after opening lower in reaction to U.S. Federal Reserve Chair Jerome Powell's speech at the Cato Institute Monetary Conference.

Whether or not the recent bounce is the start of another bull cycle or the bounce before another leg down won’t be known for some time. However, on Wednesday SentimenTrader, took to Twitter to post sentiments:

“Sometimes, there's a chart that just blows your hair back. In 22 years of doing this, none stand out like this one,” the veteran trader with 228,400 followers said.

The chart is a visual of the put-call ratio for last week, demonstrating that an immense amount of hedging took place. In fact, $8.1 billion worth of put options, or bets that stock prices will fall, were purchased compared to less than $1 billion in calls.

“This is 3x more extreme than 2008,” SentimenTrader added.

Sometimes, there's a chart that just blows your hair back.

In 22 years of doing this, none stand out like this one.

Last week, institutional traders bought $8.1 billion worth of put options. They bought less than $1 billion in calls.

This is 3x more extreme than 2008. pic.twitter.com/paqtIFxogE

— SentimenTrader (@sentimentrader) September 7, 2022

Concerns of a looming recession hit in late 2021 after inflation began to soar. The Federal Reserve turned hawkish, tightened its policy and implemented a series of steep interest rate hikes.

Although CPI data from the Labor Department for the month of July showed inflation may have peaked, Powell’s speech at the Jackson Hole Symposium stoked fears that another 0.75% interest rate raise may be in the cards for September. This launched the market into chaos.

See Also: $150B Hedge Fund Manager: Stocks May Fall 25% If Fed Keeps Raising Rates

Institutional traders loading puts may be betting that, when CPI data for the month of August is released on Sept. 13, it will show the Fed’s battle to lower inflation is far from over.

When the Fed meets on Sept. 20 and 21, the CPI data will be used to determine the stance it takes in determining the percentage at which they hike rates, which options traders may feel bearish toward.

Seasoned traders will have learned that when the market is looking one way, it’s often wise to look in the other direction. However, patience may be required before taking either a bullish or bearish position in the markets.

The Technical Perspective: The S&P 500 hinted at a bear market in mid-March, when the 50-day simple moving average (SMA) crossed below the 200-day SMA, creating a death cross, which made bullish traders grow cautious. On June 13, when the ETF fell more than 20% off its all-time high, the bear market officially took hold.

Between June 17 and Aug. 16, a bull cycle occurred in the general markets, which caused the S&P 500 to soar by almost 19%. Many technical traders, although expecting a bounce, were surprised at the strength of the bullish action.

The first clue that the market would take a turn for the worse came on Aug. 16, when the ETF attempted to regain the 200-day SMA as support and failed. Between that date and Tuesday, the S&P 500 retraced over 10% before beginning to bounce on Wednesday.

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Within every bear cycle, bounces to the upside occur and bullish periods take place. For traders and investors, the periods when individual stocks move anti-trend can be confusing because it’s difficult to decipher whether moves to the upside are a temporary bounce or whether the bear cycle is ending and a bull cycle is about to begin.

The bullish end to Thursday’s price action in the general markets may hint that at least a larger bounce is on the horizon, especially if the S&P 500 can regain the 50-day SMA as support.

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