Citadel warns of worsening short-term risk-reward balance for stocks
Citadel Securities believes that ahead of the start of September, the short-term balance between risks and potential returns in the U.S. stock market is deteriorating. Scott Rubner, head of equity and derivatives strategy, cited seasonality, the corporate earnings calendar, prospects for company share buybacks, and the behavior of retail traders among the factors, CNBC Top News reports.
The cost of downside protection
Rubner emphasized that this assessment does not mean Citadel is abandoning its positive long-term view of stocks. At the same time, he said, catalysts for growth are becoming less apparent, while reasons for caution are increasing.
In August, the S&P 500 reached an intraday all-time high of 7,816.70 points after rising nearly 7% from the end of July through the first week of August. After that, the index mostly moved sideways or declined. The Cboe VIX volatility index fell to 14.1 points last week, its lowest level since the beginning of the year.
According to Rubner, due to low option prices, protection against a stock market decline is currently relatively inexpensive. Cboe data also indicate a decline in individual stock volatility compared with index volatility.
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Seasonal factors in September
According to Citadel, September has historically been the weakest month for stocks: the average monthly return of the S&P 500 during this period is the lowest. Since 2019, average net purchases by retail investors on days when the S&P 500 falls in September have amounted to approximately half of the average figure.
Rubner also expects corporate share buybacks to slow, as the restriction period for such transactions intensifies from approximately September 12. In his view, investors are entering a period richer in macroeconomic events while paying a relatively low premium for protection against a market decline.
Mandy Xu, head of derivatives market intelligence at Cboe, said that stronger-than-expected results from technology companies, including NVDA, reduced the volatility risk premium for technology stocks as concerns about artificial intelligence-related trading eased.
