When E-Trade Financial recently asked investors to choose a movie title to describe their feelings about the current market, they named Dazed and Confused.
This may sound cheesy, but that title captured investor sentiment, which was more bearish than it had been in more than a year.
Fifty-five percent of investors surveyed in early January said they were bearish about the current market, up from 50% in the fourth quarter and way up from 34% in last year’s first quarter.
Forty-six percent of respondents said the market would drop in the next three months, 34% said it would rise and 20% said it would stay where it was.
Every quarter, E-Trade polls self-directed active U.S. investors who manage at least $10,000 in an online brokerage account. The most recent survey, administered by ResearchNow, comprised 919 respondents, two-thirds men and one-third women.
Eighty percent of investors in the study rated the U.S. economy as fair, good or great, while only 20% said it was poor or extremely so.
Indeed, 47% said the economy was robust enough for the Federal Reserve to boost interest rates again this year.
“A bearish outlook on the stock market can be expected given the performance we have seen at the start of this year,” George Fischer, senior vice president for trading, margin lending and cash management at E-Trade, said in a statement.
“Yet, when coupled with a positive view of the U.S. economy, short-term market movements can be viewed as opportunities.”
Fischer said options may be a way for investors to hedge downside risk or generate income, and offered some insights for those who looked to options as an appropriate investment vehicle in a bear market.
According to Fischer, investors with a long-term bullish view, but also worries about periodic market downturns, can hedge their long positions by purchasing put options — the ability to sell assets to another investor at a predetermined price and date.
Put options may offer protection against downside risk in the event that the underlying position decreases in value.
In addition, writing covered call options — when an asset owner sells the ability for another investor to buy the owner’s assets at a predetermined price and date — may generate income if the price of the underlying asset remains relatively stable or decreases in value.
Investors with a negative view of a particular stock or the overall market can use a bear spread — the simultaneous purchase and sale of options that expire on the same date — to reduce downside risk, while limiting upside potential.
— Check out A Recession Is Coming: Wilmington Trust on ThinkAdvisor.