As anxiety intensifies, the trading volume of the largest inverse ETF is rising.
In the $9.5 trillion ETF market, there are increasingly more pessimistic signs, which may expose the threat to the Wednesday's rebound in US stocks bought on dips. Trading activity shows that there is a growing demand in the market for some ETFs, which have benefited from the decline in large technology stocks, small companies, and semiconductor stocks.
Taking leveraged investment products as an example, these products are designed to create two or three times the inverse performance of the S&P 500 index, Nasdaq 100 index, Dow Jones Industrial Average index, small-cap stocks, and chip manufacturers. Data compiled by Strategas Securities shows that the trading volume of the top 10 ETFs tracking these themes has steadily increased this month.
ETF strategist Todd Sohn of the company stated that when the market is sluggish, investors usually trade these products more actively. He pointed out, "The number of inverse products is a measure of fear and anxiety."
Data compiled by Bloomberg's Athanasios Psarofagis shows that the daily trading volume of leveraged inverse ETFs is rising relative to long ETFs, another sign of warming risk aversion. The spread still tends to be long, but the gap is the smallest since last year. These high-intensity leveraged inverse ETFs that use derivatives to enhance returns have become a popular way for traders to express their views.
Certainly, the US stock market rose on Wednesday, with chip manufacturers leading the way, and the latest CPI data solidified expectations for a 25 basis point rate cut by the Federal Reserve next week. Despite the sharp decline in the S&P 500 index last week, it has risen by about 16% so far this year.
However, the trading of these ETF products highlighted Wall Street's concerns about the rise driven by artificial intelligence. Wall Street's well-known bear, Morgan Stanley strategist Mike Wilson, stated on Wednesday that this prosperity has "gone too far".
Other market indicators also show similar concerns. For example, data from financial analysis firm S3 Partners shows that the short interest of the $31 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD.US) has reached its highest level since June last year.
Psarofagis said that the typical buy-on-dip mentality has been relatively weak in ETFs recently. Data shows that compared to this year, the flow of stock ETFs from 2021 to 2023 has been much stronger in the weeks following a general decline in the U.S. stock market.
According to Mohit Bajaj, the ETF director at WallachBeth Capital, all of these indicators may just indicate that investors are waiting to see the outcome of next week's Federal Reserve meeting. He said, 'With the Fed's upcoming announcement of policies and the index rebalancing that will occur in September, the market has seen some volatility. Many investors are simply waiting for things to stabilize a bit, which is not surprising.'