June 10, 2016 / 7:06 PM / 3 years ago

With U.S. stocks near record highs, some investors prep for volatility

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., June 9, 2016. REUTERS/Brendan McDermid

NEW YORK (Reuters) - As U.S. stocks close in on new record highs, some investors are betting on a return of the wild ride that marked the first two months of the year.

Their reasoning: the bounce-back in commodity prices that fueled much of the 13.3-percent rally in the Standard & Poor’s 500 index since its February lows is leveling off.

That leaves investors facing an uncertain remainder of 2016, featuring a vote on whether Britain will stay within the European Union, the U.S. presidential election, the possibility of interest rate hikes by the Federal Reserve, and persistent concerns about the Chinese economy.

“We’ve got a very volatile summer coming up,” said Phil Orlando, chief equity strategist at Federated Investors, who said he has been raising cash and moving more money into defensive sectors such as healthcare and utilities.

The S&P 500 trades 1.8 percent below its record closing high of 2,130.82, reached on May 21 of last year. The index fell 10.5 percent over the first six weeks of the year as the price of crude oil slid to 13-year lows.

Recent inflows to exchange-traded products (ETPs) used to place bets on market volatility show growing expectations of more gyrations for the stock market. On a net basis, flows into short-term volatility ETPs, including the iPath S&P 500 VIX Short-Term Futures ETN (VXX.P) and VelocityShares Daily Inverse VIX Short-Term ETN XIV.P, point to substantial bets on higher volatility. This is a swing away from the start of the year, when investors were betting on calm, said Stewart Warther, an equity and derivatives strategist at BNP Paribas SA in New York.

The ProShares Ultra VIX Short-Term Futures ETF (UVXY.P) and the VXX, used to bet on higher volatility, showed four consecutive months of net flows totaling $3.56 billion between February and May, the longest streak in the last 12 months, according to Lipper data.

Brian Smoluch, portfolio manager of the Hood River Small Cap Growth fund, said that he has been holding off on adding new positions on expectation that the stock market’s smooth ride through the spring will soon give way to larger swings downward.

“Given the run-up recently, there seems to be a decent amount of complacency about problems that haven’t changed much in the last six months,” he said.

Reporting by David Randall; Editing by Nick Zieminski

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