August's sharp decline triggers a "ball effect" Will the S&P 500 hit 5750 points?
After experiencing market volatility in August, investors are preparing for an uptrend, with the S&P 500 index potentially hitting 5750 points. Nomura Securities' Charlie McElligott pointed out that the demand for call options is rising, especially after Federal Reserve Chairman Powell made dovish remarks. The market rebound is supported by the increased possibility of a soft landing, expectations of interest rate cuts, as well as investment confidence brought by corporate buybacks and reduced volatility
According to the latest stock options trading data, investors are preparing for an upcoming rise after the volatility in August.
Nomura Securities' cross-asset strategist Charlie McElligott stated that the skew of S&P 500 index call options (measuring how much traders are willing to pay for bullish positions) is rapidly steepening, indicating that investors urgently need to acquire call options following dovish remarks by Federal Reserve Chairman Powell at Jackson Hole.
He added that barring any hiccups - such as the earnings report of the most anticipated stock, NVIDIA (NVDA.US), on Wednesday local time - the S&P 500 index could rally towards 5750 by the end of September.
In a report, McElligott wrote that the market continues to "trade like a beach ball you're trying to push underwater," noting that the demand for right-tail hedging exceeds the residual forced risk management from the early August volatility event. He mentioned that despite occasional bouts of selling pressure, the stock indices are still "bouncing relentlessly."
Currently, the S&P 500 index has nearly regained all lost ground, trailing less than 1% from its peak in July, as the market optimistically believes that the Fed will swiftly cut rates to avert a U.S. economic recession. Meanwhile, the Cboe Volatility Index has dropped 60% from its peak on August 5.
McElligott stated, "It's hard to be bearish on equities outside of rationally feeling uncomfortable." He explained that the likelihood of a soft landing is increasing, the decline in volatility lays the groundwork for systematic investors to mechanically reallocate, and corporate buybacks are surging ahead of the quarterly buyback window closing on September 13.
Furthermore, the strategist noted that the volatility sellers are back, which "helps to contain and stabilize larger moves." He mentioned that if this trend continues, it will lead to further compression of trading ranges, reduced volatility, and ultimately more buying interest, especially from investors who have significantly reduced risk exposure this month through volatility control methods.
When deciding whether to buy or sell stocks, these investors typically consider short-term realized volatility, which, although not yet declining, may soon do so.
A strategist from Tier 1 Alpha stated, "We're not there yet, but if traders can continue to hold gamma long positions, the likelihood of realized inflows is much higher."
