Hedge activities are winding down
Key points
- The Equity Hedging Index plummeted below 25%.
- Alternative fear gauges, including Credit Default Swap premiums and the total put/call ratio, confirm this evaporation of hedging activity-a dynamic.
- Despite the undeniable risk-on environment, a sudden spike in Rydex bear and leveraged bear assets suggests some market participants are placing tactical hedges
The Equity Hedging Index Plummets Below 25%
The sudden unwinding of hedges across various products is a notable development taking shape beneath the surface.
Last week, as equities rallied and printed new highs, the appetite for downside bets aggressively faded. The Equity Hedging Index dropped below the 25% threshold, marking its lowest level since February of this year.
The chart below highlights the specific dates when the Equity Hedging Index crossed below the 25 level.
Historically, whenever the Equity Hedging Index crosses below this 25 threshold, momentum tends to persist. In 20 out of 23 historical instances, the SPY ETF rallied over the subsequent one-month window. With the exception of the signals