With so many unknowns in Washington, few investors want to explicitly short the market. But paying for insurance to protect on the downside is increasingly appealing to many investors.

The S&P 500 sits near all-time highs, which is no small representation of investor confidence. The market believes that the Trump administration’s policy package will boost profits and growth. In turn, stocks have been bid up.

Nobody seems to want to take the other side of that bet – that this administration’s policies won’t boost stocks. Yesterday, provocateur ZeroHedge noted that “short interest in the US equity market’s most liquid ETF has tumbled to its lowest since May 2007.”


Look what the pros are doing

Short interest is a useful indicator, but the put/call ratio of SPX options on the Chicago Board Options Exchange could be closer to the source of truth. This market is made up of the true professionals with big portfolios – your investment managers, endowments, and funds. Many of these institutional investors can’t short stocks, so hedges must come in the form of options. It’s also a far more liquid market for downside protection than simple shorts.

This chart shows the 30-day moving average of the put/call ratio on SPX options on the CBOE. The ratio has surged since late December,  a signal that these investors are hedging against a market correction.

Maybe investors have just hedged with options as market valuations continue to stretch. Or maybe there is a genuine concern for how policy will translate into the market pricing. Either way, this is an interesting indicator to continue to watch.

Cover chart: ZeroHedge