The stock market is experiencing one of its toughest Octobers in five years, with the VIX at 20 and increasing market volatility. Investors, including professional managers, hedge funds, and mutual funds, are adopting a more defensive stance and reducing their equity exposure to levels not seen since the 2022 bear market.
While market timing is often criticized, in times of market stress, investors tend to respond cautiously. The big question looming over November is whether the recent market exodus is a precursor to a rebound or a prolonged period of decline.
Doug Ramsey, Chief Investment Officer at the Leuthold Group, notes that despite the market setback, sentiment has not improved as much as expected. The prevailing sentiment has shifted from a “wall of worry” to a “slope of hope.”
Dip buyers are scarce, and the S&P 500 has experienced multiple declines of over 1% in October, pushing the index into a correction. The Nasdaq 100 Index shows increased projected price volatility, even after tech stocks received a boost from strong earnings reports.
A poll by the National Association of Active Investment Managers reveals that money managers are reducing their exposure to levels last seen in October 2022. Equity positioning has fallen below long-term averages across various investor categories. Short positions held by professional speculators have increased for nearly three months, marking a historical record.
The Cboe Volatility Index, often referred to as the “fear gauge,” has remained above 20 for two consecutive weeks. Bond market volatility has also raised concerns, particularly for companies missing earnings estimates.
Market observers suggest that the current gloom may be a positive sign from a contrarian standpoint, indicating potential buying power if sentiment reverses. Some strategists anticipate a year-end rally, citing lower stock exposure, favorable technical indicators, and seasonal factors as contributing to the possibility.
However, predicting market inflection points remains challenging, and the impact of the Federal Reserve’s “higher-for-longer” message and inflation metrics on the market is uncertain. Investors are closely monitoring the Fed’s portfolio reduction of government securities, which adds pressure to the quest for yield signals.
“Fear is uncomfortable, but it’s a healthy dynamic in markets,” said Callie Cox at eToro. “If investors are braced for the worst, they’re less likely to sell all at once if bad headlines do pop up.”
The market’s future trajectory is uncertain, and investors remain cautious in the face of ongoing volatility and potential headwinds.
