Earlier today, the Dow hit 11,000 for the first time since September 2008, up 68% from 13 months earlier. That appears to indicate that Wall Street is pretty comfortable asserting that the U.S. is in the midst of a strong economic recovery. Yet, a report from Bloomberg today might suggest otherwise: investors are increasingly hedging their bets. Do stock traders believe in their own optimism -- or do they smell a bubble?
The biggest rally in seven decades has left investors so skittish that even forecasts for a 30 percent surge in U.S. earnings are failing to keep them from hedging bets on equities.
The premium on options that insure against losses in the Standard & Poor's 500 Index over those wagering on gains, known as skew, rose to the highest level since June 2008, data compiled by Bloomberg show. Traders sought protection as shares rallied for six weeks, pushing a measure of momentum that compares stocks with their 50-day average to the most bearish reading in 13 months, according to Bespoke Investment Group LLC.
This news is a little troubling. If the market was in broad, unquestioning agreement on the strength of the U.S. recovery, then such hedging wouldn't be as prevalent. Instead, investors are protecting themselves from a market reversal. They may not have faith in their optimistic forecasts.