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Surging Consumer Sentiment and Record High Call Options: How Long Can the Good Times Roll?

Mark Willet in front of stock market with bull background

Mark Willet
June 19, 2023

Good morning,

Both the stock and bond markets are closed today in observance of the Juneteenth holiday.

The University of Michigan said early Friday that preliminary results showed its index of consumer sentiment jumped to 63.9 in June from May’s 59.2 reading. “Consumer sentiment lifted 8% in June, reaching its highest level in four months, reflecting greater optimism as inflation eased and policymakers resolved the debt ceiling crisis,” the report said. However, the survey also indicated that “a majority of consumers still expect difficult times in the economy” over the next 12 months.

The National Association of Active Investment Managers’ exposure index last week hit its highest level since late 2021, while cash levels among global fund managers surveyed this month by Bank of America fell to their lowest point since January 2022. Meanwhile, options investors are buying calls – bets on upside in stocks – at levels not seen in years. A record 1.8 million S&P 500 calls traded on Thursday, helping lift the one-month moving average of calls-to-puts to the highest in at least four years, Trade Alert data showed.

Brent Kochuba, founder of options analytic service SpotGamma, said that while extreme levels of call option buying can support markets, it also warrants caution in the near term. “The trend is probably higher … but in the very short term we have gotten over our skis,” he said.

US benchmark equity indexes fell Friday as Federal Reserve Governor Christopher Waller said additional policy tightening may be needed to bring inflation down. The Nasdaq Composite slid 0.7% to 13,689.6, while the S&P 500 fell 0.4% to 4,409.6. The Dow Jones Industrial Average closed 0.3% lower at 34,299.1.

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