Wondering[1] how the U.S. stock market keeps skirting disaster? It’s not complicated. For all the drama at their doorstep, trader positioning remains overwhelmingly bullish.
It’s visible in manager surveys[2], which last week showed equity funds only a trifle less long than at the height of January’s euphoria. It’s in markets for call options, where individual investors are engaged in a buying binge of historic dimensions. It’s tech IPOs, stocks favored by short sellers and ones with shaky balance sheets, all of which recently surged.
For traders so inclined, each trauma is just another test, even as their frequency quickens. In Tuesday’s version, Donald Trump’s threat to slap on $200 billion more in goods from China[3] sent the S&P 500 down as much as 1.1 percent, while the Dow Jones Industrial Average fell for a sixth day, the longest streak since March 2017.
“We’ve had more negative catalysts and more negative pull this year than we’ve had for a long time, but the positives continue to prevail in the investor’s mind,” Jeff Carbone, a managing partner at Cornerstone Wealth in North Carolina, said by phone. “They’re shrugging off the negativity and taking the positive to a greater extent that this is not the end.”
It’s not that people haven’t been warned. They have their memories of February and March, and strategists at banks from Morgan Stanley[4] to Goldman Sachs have repeatedly urged investors to rein in optimism, citing everything from politics to peak earnings and monetary tightening. Earlier today, Citigroup flagged a potential bubble in growth stocks.
But the caveats have gone unheeded. In one example, smaller options investors, defined as those who typically trade 10 contracts or...