Extreme Risk Reflected By Retail Call Buying

It is axiomatic that bull markets end with broad retail interest when people who don’t typically have an interest in stock markets are enthusiastic buyers. This behaviour has preceded every major bear market. It occurred in 1929 and 2000. It is happening today.

The chart below illustrates public interest in common stocks through their unprecedented buying of call options over the past year. The scale dwarfs the upsurge of interest seen before the 2000 and 2008 bear markets. This behaviour becomes more worrisome because it is matched by a historically high level of margin debt.

Retail investors have never previously been as levered to market volatility as we see today.

The result, in our opinion, is a very high-risk market environment. We discuss our risk calculations at length in the recently published February issue. We also update our views on global markets, our current investment positions, and our methods to optimize risk/reward.

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