Equity Hedging Activity Drops
Several times over the years, we've looked at an
indicator that we call the Equity Hedging Index (EHI).
As a reminder, the Index takes into account
various ways that most speculators would hedge against a market decline:
1. Raise cash
2. Buy put options
3. Trade an inverse ETF or mutual fund
4. Sell short futures contracts
5. Buy credit default swaps
The Index looks at each of the measures above and
compares current levels to historical averages. The more they show hedging
behavior, the higher the EHI would go, and vice-versa.
For the latest week, the EHI has dropped down to
19, one of the lowest readings we've recorded in the past decade. The
others are highlighted with the red arrows.
Click chart for larger view
This is a preliminary reading for this week - we
don't yet know how many puts were bought to open this week. If small and
large options traders reduced their put buying to where it was at the end of
December, then this week's EHI will drop to 10, just above the lowest reading on
That reading was back in mid-December 2010, which
was a market quite similar to what we're seeing now. While it was a much
more seasonally positive time of year, many sentiment indicators had gone to
extremes, and yet stocks continued to creep higher day after day...until the
correction ultimately hit and wiped out those gains.