The market’s post-U.S. presidential election rally has begun to lose momentum as the prospect of slower interest rate cuts has dampened investor enthusiasm. Some of the bullish trades placed around the election are now being unwound, especially those betting on continued volatility reduction.
One such trade involved buying put options on the Cboe Volatility Index (VIX), anticipating that market swings would subside as the election uncertainty cleared. These puts, bought at strikes of 15, 14, and even 13, initially profited as the VIX dipped below 14. However, the options lost value in the early days as volatility declined, failing to boost their prices despite the drop in market fluctuations.
While the swift resolution of the election initially pushed stocks to record highs, the focus has since shifted back to interest rates, earnings, and the practical realities of a new administration. Last week, the S&P 500 Index saw a 2.1% drop, reflecting the market’s changing sentiment.
“Now that the initial post-election rally is fading, traders are realizing the high level of uncertainty surrounding the potential impacts of a ‘Red Sweep,'” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.
Technology stocks, in particular, came under pressure last Friday, leading to a shift in positioning away from the extreme bullishness seen earlier in November. Nvidia, a leader in artificial intelligence and the largest stock in the S&P 500, saw significant selling of call options ahead of its earnings report this week.
“We’re seeing investors pull back from big tech stocks, while placing speculative bets on biotech and consumer staples that could be negatively affected by potential policies under Trump,” Murphy explained.
This shift was especially noticeable in the biotech sector, where shares of vaccine manufacturers fell sharply following the nomination of Robert F. Kennedy Jr., a vocal vaccine skeptic, to lead the Department of Health and Human Services. As a result, one-month implied volatility and put skew on the SPDR S&P Biotech ETF reversed nearly all of their declines from the post-election rally, with investors buying bearish contracts on the ETF, according to Daniel Kirsch, head of options at Piper Sandler.
Concerns over potential tariffs also led to hedging activity across European ETFs, Kirsch added. “Enthusiasm since the election has started to fade as the market now grapples with a stronger dollar, rising interest rates, and recent cabinet appointments,” he said.
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