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Traders are buying more call options, signaling growing confidence that stock prices will rise soon.
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This optimism is backed by investors shifting billions from bond ETFs into stock ETFs following tariff cuts.
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Such moves reflect a strategy of buying during dips, which history shows often leads to strong long-term gains.
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Investor sentiment is clearly shifting, and two key signs show this change:
- More bullish bets on stocks: Traders are buying more call options, which are bets that stock prices will rise. The number of call options compared to put options is now close to its highest level since February 18 — just before the S&P 500 last reached a record high.
- Money is moving back into stocks: Investors are pulling money out of bond ETFs and putting it into stock ETFs instead. In the last two days alone, funds like Vanguard S&P 500, SPDR S&P 500 (NYSE:SPY), and iShares Russell 2000 have received about $6 billion, helped by a market rally after tariffs were reduced.
Why Are Investors Turning Bullish?
There are a few reasons for the optimism—mainly that the worst of the tariffs may be behind us, and Trump is expected to reach trade deals with several countries. But the two key reasons are:
- Volatility is falling fast: The S&P 500’s fear gauge, known as the VIX, dropped from over 40 to under 20 in record time. This kind of sharp drop has historically led to strong stock returns. When the VIX falls this quickly, the S&P 500 has tended to rise by about 3% in one month, 5% in three months, 8% in six months, and 10% in a year.
- Fewer rate cuts expected, but still supportive: Traders now expect the Fed to cut interest rates twice, instead of four times as they did last month, thanks to easing trade tensions. The first cut is still expected in September. The bond market now sees about 55 basis points of rate cuts by December, down from 75 basis points earlier. This signals confidence that the economy may stay on track without needing aggressive help from the Fed.
The real winners are not the ones jumping in now. They are the patient investors who stayed calm during the storm.
When trade tensions flared up in early April, nearly $6.6 trillion was wiped off the US stock market in just two days—one of the worst two-day drops since the S&P 500 began in 1957. But some investors did not panic.
Instead, they stuck to what they had learned over the past 15 years: buy the dip. Six weeks later, the S&P 500 has not only recovered but has climbed about 17% from its lows, rising past the levels seen before the tariffs.
Retail investors have become a powerful force in the markets. By the end of 2024, they held $35 trillion in Wall Street stocks—about 38% of the market (according to data from the Federal Reserve and Goldman Sachs (NYSE:GS)). Their trading activity is strong, with volumes near record highs, second only to the meme stock surge of early 2021.
When markets dropped sharply in early April, retail investors acted quickly. At Charles Schwab (NYSE:SCHW), which has 37 million active securities accounts, clients made nearly 10 million trades per day in the first two weeks of April—a 36% jump from earlier in the year. The firm also saw a surge in new account openings.
Robinhood Markets (NASDAQ:HOOD) reported a similar spike. Its equity trading volumes reached four-year highs, and options activity neared record levels. Even as markets fell, its clients kept buying.
JPMorgan Chase (NYSE:JPM) said its clients invested $40 billion in stocks in April alone—an all-time high.
History shows that buying the dip has often worked well in financial markets. It is not always the case, but in most downturns, this strategy has paid off.
- Take the 2020 COVID-19 crisis. Global stock markets plunged—some by more than 30%. The S&P 500 fell 33.9% but still ended the year up 16.3%.
- Or look at the 2008 global financial crisis. The S&P 500 dropped 48.8%, its worst fall since the Great Depression in 1931. But since the end of 2008, it has gained over 300%.
- Some might say it was easy to buy at the 2009 bottom. In reality, it was not. Between that low and February 2020, the S&P 500 still saw two drops of over 20%, eight drops of more than 10%, and 15 dips of between 5% and 10%.
Staying invested through all that took real discipline.
Lessons From Past Market Dips
- Every 2 years, there is a drop of at least -10%.
- Every 4 years, there is a decline of at least -20%.
- Every 9 years, there is a plunge of at least -30%.
- Every 20 years, there is a tumble of -50% or more.
The same idea applies to individual stocks. When we see the huge profits some stocks have made over 20–30 years, it’s easy to think those investors were just lucky. But they had to face many challenges along the way.
For example, Apple (NASDAQ:AAPL) gained over 8,300% in 29 years, but it also had sharp drops, including one close to 50%. Home Depot (NYSE:HD) saw its stock fall by 72%, and Nike (NYSE:NKE) faced a 70% plunge. Many other stocks have similar stories.
It’s important to remember that buying just because a stock or market has fallen a lot isn’t always smart. What looks cheap today might be expensive tomorrow. The key is to understand that market crashes happen regularly and are part of investing. Most of the time, the market rewards those who hold on and don’t panic. It’s also important to know why the crash happened—whether it’s an overreaction or due to real problems with the market or company.
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Disclaimer: This article is written for informational purposes only. It is not intended to encourage the purchase of assets in any way, nor does it constitute a solicitation, offer, recommendation, or suggestion to invest. I would like to remind you that all assets are evaluated from multiple perspectives and are highly risky, so any investment decision and the associated risk belongs to the investor. We also do not provide any investment advisory services.