Citadel Securities says the risk-reward setup for equities is deteriorating as September begins, with historically weak seasonality meeting the cheapest options prices of the year. Strategist Scott Rubner points to the earnings calendar, buyback outlook, seasonality and retail trading patterns as reasons the market's near-term asymmetry is turning less favorable, even as the firm keeps a constructive longer-term view.
Cheap protection meets a weak seasonal setup
The S&P 500 has historically posted its lowest average monthly return in September, and options prices are now the cheapest they have been all year, according to Citadel Securities head of equity and equity derivatives strategy Scott Rubner. That combination, he told clients Monday, makes buying downside protection look compelling even though Citadel's longer-term view on stocks remains constructive.
According to Rubner: "Collectively, they change the near-term asymmetry." He cited the earnings calendar, the buyback outlook, seasonality and retail trading patterns as the drivers behind the shift.
Volatility measures sit near yearly lows
The S&P 500 set an intraday record of 7,816.70 this month. It followed an almost 7% gain from the end of July through the first week of August. Since then the index has drifted sideways to lower, and the Cboe Volatility Index fell to 14.1 last week, its lowest level of the year.
Single-stock volatility has also decompressed after trading at record highs relative to index volatility, Cboe data show. The spread between Nasdaq 100 volatility, measured through the Invesco QQQ Trust, and S&P 500 volatility, measured through SPY, fell from an all-time high in June to the lowest 20th percentile in a year, according to Cboe. Cboe head of derivatives market intelligence Mandy Xu attributed part of the move to stronger-than-expected tech earnings, including Nvidia's results last week, which have eased fears around the AI trade.
Retail buying and buybacks both set to slow
September is not just weak by historical standards. It has also been the weakest month of the year for retail buying activity tracked by Citadel. Average retail net buying on down days has run at about half the average since 2019.
At the same time, corporate buyback activity is set to slow as the blackout period for companies to repurchase shares accelerates around September 12. Investors are entering a more macro event-heavy stretch while paying relatively little for protection, Rubner said.
Source: CNBC
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