Yahoo Finance’s Julie Hyman, Brian Sozzi, and Myles Udland discuss today’s market action and outlook with Stuart Kaiser, UBS Head of Equity Derivatives Research.
MYLES UDLAND: We see here futures lower on the screen, Dow futures off about 100 points, as we head towards the open. Joining us now to talk more about the setup for markets coming into this week is Stuart Kaiser. He's the head of Equity Derivatives Research over at UBS. Stuart, always great to talk to you.
So let's start with kind of getting the lay of the land as it relates to the now sneaky long, sneaky durable rotation into value out of growth. It's pretty much been six months with almost no letup in this trade. How are you guys thinking about it at this point, as we kind of get out of earnings, as some of the headline risk is starting to abate just a little bit, and we can get back to what are flows telling us about the state of the market.
STUART KAISER: Yeah, good morning, guys. Thanks for having me again. You make a great point. I think the only two times that traders really pause was actually during earnings, when investors kind of focus-- shift back to-- shifted back to fundamentals, and kind of the strong tech earnings, you know, provided a little bit of support at least to those companies. You know, what we're seeing from a flows perspective is a lot of sponsorship for that cyclical trade, but particularly the option space of the energy and materials. Those stocks have just a tremendous amount of call buying, a lot of upside participation.
And I think for two reasons. One is the recovery and growth. And two is I think some folks see that as a way to hedge their portfolio against inflation. So you've got two kind of reasons that that trade has worked. And it's certainly very obvious in the volumes of calls especially that we've seen over the last couple of months.
BRIAN SOZZI: Stuart, large-cap tech, those stocks have been hit, as we've gotten some of these hotter inflation reads. What's the next direction looking like for some of these stocks?
STUART KAISER: You know, tactically speaking, we actually think tech is going to recover a little bit now that we're past that strong inflation data and past the early kind of part of the month where you've got a lot of economic data in the US. So basically, you think of sequencing wise, tech was under pressure. It stabilized a bit during earnings. And then it came under renewed pressure again once that inflation data came out. What we're thinking/hoping is that now that that inflation data has been digested a bit last week, that that'll give tech a little bit of room here to recover over the kind of next four to six weeks.
But to your point, I mean, the inflation of rate story has really tripped up the tech trade. A lot less retail participation in the market, I think, has also been a little bit of a headwind. So our view is, tactically here, you can see semiconductors in large cap tech recover. But certainly, it is swimming upstream a little bit recently.
JULIE HYMAN: Yeah, and Stuart, it's Julie here. I want to dig more into that chart that you sent us that we have up on the screen, which looks at call and put options on tech in the S&P 500. And obviously, we've seen a big pullback in both of those, but now sort of stabilization, I guess. Does that have any sort of forward-looking indicator for us? Can we sort of read anything into that as to what is going to happen next?
STUART KAISER: I think what we're reading into that is that-- and good morning, Julie-- sorry-- I would say what we're reading into that is just that positioning is a lot cleaner now than it was. You had a lot of people very bullish tech for an extended period of time. You know, seeing how those charts have evolved, I think, just suggests that, you know, things are a little bit cleaner here. Hopefully people can trade the news rather than the positioning.
But really, that's been one of the big challenges for tech, I think, is a lot of people were long exposure to that part of the market and certainly come under pressure. The rebalancing and cleaning up of that position takes a little bit of time. And hopefully, we're through the bulk of it. But so my read on that chart would be simply that hopefully that suggests that, you know, positioning is a bit cleaner. And from here, we can start to trade a little bit more normally, as opposed to from an unwind type position.
MYLES UDLAND: All right, we've got about 30 seconds here to the opening bell on this Monday morning. Again, futures pointing to some losses at the open. We talked at the top of the program about some of that merger news. We had the WarnerMedia Discovery deal. We're going to talk to Craig Moffett, coming up in about 15 minutes, more about that deal.
We see here live pictures on the floor of the New York Stock Exchange, the MTA ringing the opening bell down there on the floor. I believe today, we see 24-hour subway service resume in New York City, if I am not mistaken. And so we see the MTA there celebrating the recovery back in New York City. The city's certainly been vibrant last couple of times I've stopped in. Sadly, of course, not a city resident anymore.
Stuart, you were talking kind of about that options chart you had and about the cleaner shape of-- I don't exactly know how you would-- the board, let's call it that, right? I want to ask about the VIX in that context as well. We've discussed what you've seen in that board for a long time. And there was a point at which I think it might have been six or nine months ago we were chatting that there was still a lot of caution being priced in via the VIX, relative to how the market was performing. Has that started to normalize, especially with the VIX, we see here right around 20, but having spent a lot of time under 20 in the last month or so?
STUART KAISER: Yeah, it's a great question. And last week was quite interesting. On the sell-off we had last week, you know, the VIX actually rose much more than you might have expected, given that 2% sell-off we had. So that, I think, would suggest that the market was a little bit complacent or perhaps a little bit underhedged for that type of move. And you also saw similar moves further out the term structure. So, you know, our view is there's still, call it two points of extra vol premium priced into the shape of the curve right now. And we do expect that to slowly squeeze out.
But I think in a situation like we're in now, where there's concern about the path of inflation, there's concern about Fed tapering, there's a lot of regulatory and tax news out there, there's the occasional China trade war type discussion, I do think that premium is going to take a little bit of time to come out. And right now, you could argue it's fair. Coming from the policy stance we're in, the fact that the market's pricing a little bit more caution kind of three to six months out is probably not unreasonable.
So, you know, from our perspective, it looked like the market was a little underhedged in sort of shorter dated options. There's a premium still in that three to six-month space. But I think, you know, reasonably speaking, you could say that that premium is, call it two points. And is that too much? Eye of the beholder, I guess, I would say on that one.
MYLES UDLAND: Yeah, maybe old habits here that we learned very quickly back at this time last year. All right, Stuart Kaiser with UBS. Stuart, always great to get your thoughts. Thanks for jumping on. I know we'll talk soon.