Unease Amid Record Gains: Wall Street Quietly Positions for Downside Protection

Despite the record surge in U.S. stocks, major Wall Street dealers are advising clients to purchase cheap hedging tools to guard against potential downside risks. Trading departments, including Goldman Sachs and Citadel Securities, have warned that a series of risk events could impact the strong market momentum.

The S&P 500 index has risen 28% since April 8, and the Wall Street fear index VIX has dropped to its lowest level since February. Major stock indices continue to soar, driven by the signing of trade agreements and a robust earnings season.

However, key events such as the upcoming Federal Reserve interest rate decision, President Trump's tariff deadline, and earnings reports from major tech companies are prompting traders to advise clients to take protective measures in advance. The current market environment has brought hedging costs to their lowest level since January, providing investors with a cheap protection opportunity.

Analysis indicates that although technical and fundamental indicators still show optimistic signals, this cautious attitude from Wall Street investment banks reflects institutional investors' concerns about the market's high performance.

Wall Street's Major Banks Strategists Consistently Recommend Increasing Protection

The strong market rally is providing investors with low-cost hedging opportunities. The cost of protection against a 10% drop versus a 10% rise in exchange-traded funds tracking the S&P 500 index has fallen to its lowest level since January.

According to media reports, strategists from several Wall Street institutions are advising clients to increase market protection. Goldman Sachs' trading department wrote in a report to clients, "If you feel nervous, the market is making it very easy to rent hedging tools."

John Tully from Bank of America Securities told clients, "It's time to buy volatility," noting that the VIX index historically tends to hit its lowest point of the year in July. He recommended clients purchase S&P 500 put options expiring on August 22, which would cover most of the market reaction during the Federal Reserve's annual economic symposium in Jackson Hole.

Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities, urged investors to turn to hedging tools expiring in September to guard against macro event risks.

He cited historical data since 1928, indicating that September is the worst-performing month for the U.S. stock market, providing historical justification for the current hedging advice.

Multiple Risk Events Approaching Intensively

In the next two weeks, several important events that could impact market trends will take place.

1. The Federal Reserve's interest rate decision on July 30 is highly anticipated, and any hints regarding its policy direction could trigger significant volatility.

2. President Trump's tariff deadline is also worth noting. Although the U.S. has reached agreements with some trading partners, negotiations with key partners like Mexico and Canada have yet to make breakthroughs. Any stalemate in trade negotiations could reignite trade tensions and dampen investor sentiment 3. The July non-farm payroll report has significant implications for the Federal Reserve's policies in the coming months.

4. The key earnings reports from major tech companies, including NVIDIA, are still pending, and these results could have a substantial impact on market trends.

Ilan Benhamou, a member of JP Morgan's equity derivatives sales team, advised clients to purchase put options expiring on August 1 to hedge against a potential market crash due to the tariff deadline and the July non-farm payroll report released on the same day.

However, some strategists believe there are also reasons to think the current rally will continue.

Rubner from Citadel Securities believes that retail traders may provide support. Tully from Bank of America Securities stated that if the Federal Reserve finds that tariffs have neither raised inflation nor hindered economic growth, a rate cut in September could further boost the stock market