"Wall St. Panic Amidst Skyrocketing US Stocks: Buying Frenzy Continues"

If one were to take a cursory glance at the current U.S. market, what would undoubtedly catch the eye is a picture of health—the S&P 500 index has just set its 45th record high for the year, corporate bonds show no signs of concern, and commodities continue to rise driven by optimism about the global economy.

However, upon closer examination, the outlook quickly becomes somewhat bleaker.

Amidst the cheers from the outside world, volatility is a significant issue faced by almost all asset classes. In August and September, market conditions turned against traders, catching many off guard and prompting them to hedge, which significantly increased the cost of hedging protection, even at a pace as fast as the market's own rise.

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This fervor has created an unusual profile across various assets. For instance, the volatility indices for the United States and U.S. Treasury bonds have recently recorded substantial weekly increases this year. Compared to other periods when the S&P 500 index set records, both of these volatility panic indices are currently at a relatively high level not seen in over two decades.

In summary, due to next month's U.S. elections, uncertainty about the Federal Reserve's policy trajectory, and recent market trauma, the trading sentiment of Wall Street's main stakeholders remains very tense.

Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, said, "The likelihood of low-probability, very bad events is becoming higher. After the VIX index surged in August, the market did indeed normalize and set new highs. However, the underlying 'concern' sentiment remains high."

Although asset prices have also often risen during times of investor anxiety, the current situation is particularly extreme—with bullishness and skepticism coexisting.

The S&P 500 index has risen for five consecutive weeks, with eight out of the past nine weeks seeing gains, and on Friday, it closed at a record high for the year for the 45th time after JPMorgan Chase and Wells Fargo's earnings exceeded expectations. The spread of U.S. investment-grade bonds has also reached its narrowest in over three years.

But at the same time, due to the vivid memory of the market plunges in early August and September, the level of investor caution shows a rare prudence during bullish periods. Since the beginning of this month, the U.S. stock market volatility indicator VIX and the U.S. Treasury volatility indicator MOVE index have both risen significantly.

A Bank of America indicator measuring global cross-asset risk has reached the second-highest level this year, just behind the level during the sharp drop in early August, which wiped out trillions of dollars in global stock market value in just a few days. This indicator tracks stress in global stock markets, interest rates, currencies, and commodities, and measures the implied future price volatility of options.Panicking yet buying non-stop?

In other words, although the market remains calm and even thriving at this very moment, past shocks and an uncertain future still have a significant impact on market sentiment.

Traders, shaken by the summer market chaos, are struggling to deal with the deadlocked US election and conflicts in the Middle East. Of course, this also includes the seemingly expanding US economy, where some data seems to be intensifying people's doubts, such as the unexpectedly high initial jobless claims this week...

At the same time, there is a growing feeling that the Federal Reserve led by Powell may not be willing to immediately inject a large amount of new vitality into the economy. Thursday's September CPI data showed higher-than-expected inflation, coupled with last week's surge in US non-farm employment, has led traders to unwind bets on significant rate cuts for the rest of 2024. Atlanta Fed Chairman Bostic even said he is open to skipping another rate cut next month.

Academy Securities' head of macro strategy, Peter Tchir, pointed out, "There is almost a sense of distrust in the market. There have been some significant fluctuations in the overnight market. The market is full of worries, but the stock market is generally rising. We have experienced several rapid declines."

At the same time, there are signs that after five consecutive months of synchronized rebounds by investors, short positions in bonds and stocks are being rebuilt.

IHS Markit's data shows that bearish bets on the SPDR S&P 500 ETF Trust (SPY) have reached 2.4% of its circulating shares, higher than the four-year low of 1.6% at the beginning of this month. Similarly, the short ratio of the iShares 20+ Year Treasury Bond ETF, which hit a 15-month low in August, has now risen to more than 1%.

The options market also shows that there is a strong demand for hedging when the stock market plummets, and tail risk hedging measures have reached a level rarely seen in the past two years. The MOVE index, which tracks bond volatility, is soaring to its highest point since January, and a similar index for crude oil has also soared to a level not seen in two years. Since August, the implied volatility of the iShares iBoxx Investment Grade Corporate Bond ETF has increased relative to actual price volatility, which is the latest sign that traders are paying hedging fees to prevent losses.

However, it is particularly interesting that against the backdrop of a more than 40 basis point increase in the 10-year US Treasury yield in the past month, the S&P 500 index has still risen by about 3% - a level of resistance to falls that has not been seen since April 2022.

Erika Maschmeyer, portfolio manager at Threadneedle Investment Company, pointed out, "Despite some macro and micro risks, the market has been very strong. As the election countdown and the next Federal Reserve interest rate decision approach, we would not be surprised if there is a correction."The latest Q3 earnings season will clearly be the next test for the US stock market. According to FactSet data, the market expects the S&P 500 Index to report a year-over-year earnings growth of 4.6% in the third quarter. Since June 30th, the market's earnings forecasts for US companies in the third quarter have been revised down by 3.8 percentage points, with eight industries seeing their earnings forecasts reduced, with the energy sector facing the largest decline.

Trivariate Research founder Adam Parker said: "This time, the earnings season will be more important than usual. We need specific data from companies."