Bearish Bets Against Markets Are Surging

Investors are wagering that the recent pain in markets will intensify.

Stocks dropped sharply in another wild session Tuesday after Russia deployed troops into two breakaway areas of Ukraine, escalating tensions in the region. The S&P 500 ended the day down 1%, extending the losses from its January record to more than 10% and meeting the criteria of a market correction. The index hadn’t suffered a similar decline since February 2020.

Short sellers have been adding to their positions against the SPDR S&P 500 Exchange-Traded Fund Trust, which tracks the broad U.S. stock index, at the fastest rate in nearly a year. Other investors are scooping up at record pace options contracts that would pay out if the recent declines in the stock and bond markets worsen.

The escalating geopolitical tensions come at a time when a surge in inflation and uncertainty about the pace of the Federal Reserve’s expected interest-rate increases have already whipsawed financial markets to start the year. Earnings growth, meanwhile, is expected to moderate from its red-hot pace in 2021, when profits were being compared with their knocked-down levels during the early stages of the pandemic.

The S&P 500 is down 9.7% in 2022, while the tech-heavy Nasdaq Composite has tumbled 14%. In the bond market, benchmark borrowing costs rose above 2% earlier this month for the first time since mid-2019.

“Sentiment is really poor,” said Danny Kirsch, head of options at Piper Sandler, who said he has noticed more clients opting for hedges recently. “People are nervous.”

Short sellers added $8.6 billion to their positions against the SPDR S&P 500 ETF Trust over the four weeks through Thursday, according to projections from technology and data analytics company S3 Partners. That amount would be the highest since a four-week period ending in early March 2021.

Short sellers borrow shares and sell them, with a plan to repurchase them at lower prices and pocket the difference. Investors shorting the market may be placing an outright bet that stocks will fall or reducing their exposure to a market downturn while betting that particular stocks will outperform.

Jordan Kahn, chief investment officer at ACM Funds, said his firm has been trimming its positions in stocks in one of its strategies while adding to short positions against exchange-traded funds that track the broad market.

Mr. Kahn said he grew concerned near the end of 2021 when he saw that individual stocks were selling off, while the largest stocks kept major indexes afloat.

“That’s kind of a red flag for us,” he said. “We think that the most likely scenario is that those big stocks that haven’t had as big a correction yet will probably at some point play catch-up to the downside.”

Investors are loading up their bets against a number of big tech stocks that led the way higher in recent years, positioning for a reversal. Investors added $1.3 billion to their short positions against Tesla Inc. over the 30 days through Friday and almost $844 million to their bets against Nvidia Corp., according to S3 Partners. They have been trimming their bets, by contrast, against Bank of America Corp., Apple Inc. and Texas Instruments Inc.

Nvidia shares have fallen 20% in 2022 but are still up 63% over the past year. Tesla is down 22% this year but is up 15% from a year ago. Both stocks have skyrocketed since the end of 2019.

Many traders have stepped in to buy the stock market dips, despite the volatility. However, traders have also been tapping other options strategies to profit from the downturn or hedge their portfolios. Three out of five of the most active days for put options trading in history have occurred in the first weeks of 2022, according to Cboe Global Markets data as of Friday.

Call options on single stocks as a percentage of total options activity recently fell to the lowest level since April 2020, when the Covid-19 pandemic was first spreading through the U.S., according to Goldman Sachs Group Inc.

For much of last year, turbocharged bullish bets on stocks were in vogue, and many traders rode the S&P 500’s ascent to 70 fresh highs.

Calls give the right to buy shares at a later time, by a stated date. Puts confer the right to sell.

Investors are also hedging against potential declines in the bond market. The prospect of higher interest rates has triggered a rush out of bonds, with outflows from money-market and bond funds on pace to be the biggest in at least seven years.

The number of put options outstanding tied to the iShares iBoxx $ High Yield Corporate Bond ETF, which goes by the ticker HYG, and iShares iBoxx $ Investment Grade Corporate Bond ETF, or LQD, recently jumped to the highest level on record, according to Barclays PLC.

To some traders, the dour sentiment can be an opportunity to capitalize on any rebound.

Julien Stouff, founder of hedge-fund firm Stouff Capital in Geneva, Switzerland, said he placed short-term bullish bets on stocks in January around the time he noticed many traders growing more pessimistic on the market. Recently, he has taken a neutral stance through the options market.

“This fear normally creates a buying opportunity,” he said.

An original watercolour illustration for the cover of Harry Potter and the Philosopher’s Stone, 1997 — the first book in J.K. Rowling’s hit series—could sell for US$600,000 at a Sotheby’s auction this summer.

The illustration is headlining a June 26 sale in New York that will also feature big-ticket items from the collection of the late Dr. Rodney P. Swantko, a surgeon and collector from Indiana, including manuscripts by poet Edgar Allan Poe and Arthur Conan Doyle, author of the Sherlock Holmes books

The Harry Potter illustration, which introduced the young wizard character to the world, is expected to sell for between US$400,000 to US$600,000, which would make it the highest-priced item ever sold related to the Harry Potter world. This is the second time the illustration has been sold, however—it was on the auction block at Sotheby’s in London in 2001, where it achieved £85,750 (US$107,316).

The artist of the illustration, Thomas Taylor, was 23 years old at the time and a graduate student working at a children’s bookshop. According to Sotheby’s, Taylor took a “professional commission from an unknown author to visualise a unique wizarding world,” Sotheby’s said in a news release. He depicted Harry Potter boarding the train to Hogwarts on platform9 ¾ platform, and the illustration became the “universal image” of the Harry Potter series, Sotheby’s said.

“It is exciting to see the painting that marks the very start of my career, decades later and as bright as ever! It takes me back to the experience of reading Harry Potter for the first time—one of the first people in the world to do so—and the process of creating what is now an iconic image,” Taylor said in the release.

Meanwhile, to commemorate the 175th anniversary of Edgar Allan Poe’s For Annie , 1849, Sotheby’s recently reunited the autographed manuscript of the poem with the author’s home, Poe Cottage, in the Bronx.

The cottage is where the author lived with his wife, Virginia, and mother-in-law, Maria Clemm, from 1846 until he died in 1849. The manuscript, also from the Swantko collection, will remain at the home until it is offered at auction at Sotheby’s on June 26 with an estimate between US$400,000 and US$600,000.

The autographed manuscript will remain at Poe Cottage until it is offered at auction at Sotheby’s on June 26.
Matthew Borowick for Sotheby’s

Poe Cottage, preserved and overseen by the Bronx County Historical Society, is home to many of the author’s famous works, including Eureka , 1948, and Annabel Lee , 1927.

“To reunite the For Annie manuscript with the Poe Cottage nearly two centuries after it was first composed brought to life literary history for a truly special and unique occasion,” Richard Austin , Sotheby’s Global Head of Books & Manuscripts, said in a news release.

For Annie was one of Poe’s most important compositions, and was addressed to Nancy “Annie” L. Richmond, one of the several women Poe pursued after his wife Viriginia’s death from tuberculosis in 1847.

In a letter to Richmond herself, Poe proclaimed For Annie was his best work: “I think the lines For Annie much the best I have ever written.”

The poem was composed in 1849, only months before Poe’s death, Sotheby’s said in the piece, Poe highlights the romantic comfort he feels from a woman named Annie while simultaneously grappling with the darkness of death, with lines like “And the fever called ‘living’ is conquered at last.”

Poe Cottage, preserved and overseen by the Bronx County Historical Society, is home to many of the author’s famous works, including Eureka, 1948, and Annabel Lee,, 1927.
Matthew Borowick for Sotheby’s

In the margins of the manuscript are the original handwritten instructions by Nathaniel P. Willis, co-editor of the New York Home Journal, where Poe published other poems such as The Raven and submitted For Annie on April 20, 1849.

Willis added Poe’s name in the top right and instructions about printing and presenting the poem on the side. The poem was also published in the Boston Weekly that same month.

Another piece of literary history included in the Swantko sale could surpass US$1 million. Conan Doyle’s autographed manuscript of the Sherlock Holmes tale The Sign of Four , 1889, is estimated to achieve between US$800,000 and US$1.2 million.

Bearish Bets Against Markets Are Surging

Investors are loading up their bets against a number of big tech stocks, positioning for a reversal.