For Club iNSIDER Traders: Trapped in the Short Range. Why Every Decline Triggers an Avalanche of Sales

Options dealers remain with a short gamma, meaning they must sell if the market falls and buy if it rises, amplifying market volatility. This suggests that “conditions for higher volatility remain firmly in place,” according to options strategists at Tier 1 Alpha. While implied volatility has slightly decreased, the damage has already been done, and a recovery in risk appetite will likely take more time. However, before the market adopts this more positive scenario, uncertainty must be reduced. “Stocks will suffer, in increments and gradually, if the U.S. does not back down,” says Peter Tchir, macro strategist at Academy Securities. “My base case is that we’ll realize this approach doesn’t work, and ultimately we will come to some compromise deals.”

The correction in U.S. stocks this year, while deep, follows a strong bull market that continued for the past two years. History shows that this is not the worst time to enter the stock market. An analysis of the daily S&P 500 levels with a 60-day return of -15% or more, compared to the long-term 500-day return, shows that the current situation falls into two statistical clusters: 1998 and 2022. In both years, new gains followed the correction.
While this is just statistics, it supports the argument that investors are likely to maintain their exposure to stocks and even increase it if there are additional gains, in the absence of a complete collapse of the financial system or the global economy.