Market Watch: The Pros are Getting Ready for a Market Crash - Retail Investors, Not so Much, Top Economist Warns

Article by Shawn Langlois in The Wall Street Journal Market Watch

‘A large market correction, should one materialize, would encourage more professional selling that could overwhelm the buy-the-dip retail investor.’

That’s Mohamed El-Erian, Allianz’s chief economic adviser, explaining in an op-ed for the Financial Times how action in the options pits should be taken as a warning by retail investors who have been cashing in on the stock market’s relentless push higher in recent months.

“The seemingly endless rally… gives the impression that prices are endorsed and supported by the entire professional investment community,” he said. “After all, despite the vocal concerns over valuations having split away from underlying corporate and economic fundamentals, few fund managers have been willing to challenge the market by placing outright shorts. “

However, “sophisticated investors” are expressing their cautious views with the use of derivatives, and El-Erian says the mom-and-pop types should take note.

“It is hard to overstate the extent of today’s risk-taking in U.S. financial markets,” he wrote

“Much of this could be seen as market deepening were it not for one troubling fact: corporate and economic fundamentals have yet to reflect a sustained and convincing recovery from COVID-related damage,” he said. The rebound in consumption is slowing, initial jobless claims are back to the 1 million level for a second straight week, bankruptcies are rising.

He pointed out that buying call options limits risk and gives traders the ability to take strategic shots at capturing rallies. At the same time, the smart money is hedging bets with downside “tail protection” to guard against ....

To read this article in Market Watch in its entirety, click here.