Sudden change in US stock market sentiment! From "FOMO" to "fear of a crash," market crazily buys index decline insurance

In the past few months, the "fear of missing out (FOMO)" sentiment that has been driving the continuous record highs in the US stock market is rapidly receding, replaced by the "fear of losing everything". With AI trading experiencing its most severe pullback since 2026, and risks of inflation and rate hikes resurfacing, Wall Street funds are flowing at an unprecedented speed towards defensive positions. The latest options market data shows that investors are massively buying downside protection tools for the S&P 500 index and the Nasdaq 100 index, indicating that the market is beginning to prepare for a potential larger adjustment in the coming weeks. Mandy Xu, Global Derivatives Market Intelligence Director at the Chicago Mercantile Exchange, vividly portrays this shift: the skew measuring demand for downside protection options on the S&P 500 index has surged violently from its lowest point in a year to the 72nd percentile of observed values. Xu pointed out in a phone interview: "The sell-off last Friday was significant, it made traders realize the risks hidden in the stock market. After everyone has been chasing highs and selling lows, the market lacks measures to hedge against downward risks. But now we see a reversal at the index level, indicating that investors are aware that the market may further decline." Snapshot of the downturn: US stocks facing "Black Friday", breadth shrinking and market maker Gamma reversal amplifying selling pressure From euphoria to panic, it only took one non-farm payroll data release. On June 5th, "Black Friday," the S&P 500 index plummeted by 2.6%, ending a nine-week consecutive rise. The Nasdaq 100 index even saw a nearly 4.8% drop, marking the largest single-day drop in 14 months. As of the close on June 9th, the S&P 500 closed at 7386.50 points, down about 2.9% from its peak of 7609.78 points on June 2nd. Before the market opened on Wednesday, US stock futures continued to weaken, with S&P 500 futures down 0.8% and Nasdaq futures falling by 1.2%. The top five components of the S&P 500 index (Apple, Nvidia, Microsoft, Amazon, Google) now account for the highest proportion of the index's total market value in history. According to data from Deutsche Bank, after hedge funds actively bought in last week, the portfolio allocation in US mega-cap tech stocks has reached the 97th percentile in history, almost the most crowded level in history. At the individual stock level, Apple has faced the most direct pressure. On Tuesday, the Nasdaq 100 index fell by about 2% again, with the technology and energy sectors leading the decline - but it is worth noting that the simultaneous decline in the energy sector is more due to weight drag, with most other sectors still in positive territory, indicating that this is a narrow sell-off rather than a comprehensive reduction in positions. The intraday structure of the options market is systematically amplifying the downward momentum. The latest Gamma data shows that the critical Gamma reversal point for the S&P 500 index is currently around 7,464 points. When the index is below this level, market makers shift to a negative Gamma state, and their dynamic hedging behavior shifts from "high selling and low buying" to "sell on the decline, buy on the rise". The self-reinforcing mechanism in extreme market conditions has been triggered. Negative Delta capital flows from zero-date call option sellers are dominating the short-term market, directly weakening the sustainability of any initial rebound. On the quantitative trading front, systematic strategies such as volatility control funds and commodity trading advisors are shifting from long to neutral or even short positions, with the CBOE VIX index surging 6.97% on June 10th, closing at 21.23 points, significantly deviating from the previous low volatility range. The pattern of "systematic funds continuously buying" in the past few months has loosened, and once CTAs trigger sell signals, the scale of their portfolio adjustments is enough to amplify the market's downward movement on a daily basis. Options signal panorama: Divergent hedge reveals real market fear - the risk lies not in individual stocks but in the system Market fluctuations are the result of the past, and options positions are votes for the future. The current options market presents a highly divergent pattern: while investors are increasing their exposure to individual stock upside, they are hedging downside risks at the index level. Skew data: Rapid surge in demand for downside protection As of June 9th, the one-month options skew of the S&P 500 has jumped from a year-low to the 72nd percentile, indicating that the prices of put options for downside protection are systematically increasing. Just a month ago, these same traders were only worried about "missing out". The options skew had dropped to its lowest point in a year, with put options requiring almost no premium, and the market had almost completely ruled out the possibility of a decline. Now, the same indicator has sharply risen. On June 8th, the trading volume of US stock index options rose to 6.36 million contracts, with a put/call ratio of 1.24. While the overall market put/call ratio is slowly declining, the put/call ratio for stock indices continues to rise. This divergence is the entire story of the current market situation: while the market is buying popular AI stocks, it is massively increasing holdings of S&P 500 index put options to hedge against the concentration risk. Looking at the individual stock level, the 25-day put skew of the SPDR S&P 500 ETF has risen from around 2.8 to about 5.5, surpassing its 250-day average. The put/call ratio for the S&P 500 index has reached 2.22 - the put side capital flow is extremely active. At the individual stock level, bullish momentum continues. The percentage of new put options opened by retail traders in large-cap tech stocks has risen from 15% a week ago to 27%, indicating that although retail investors are "seemingly" increasing their bearish exposure, about 73% of the new positions are still bullish or long. However, the put/call ratio at the individual stock level presents a completely different picture: out of the $3.7 billion options traded in the Invesco QQQ Trust ETF on Tuesday, about $2.5 billion were put options - nearly two-thirds of the options. This means that investors are not abandoning tech stocks, but are continuing to hold or even increase their positions while systematically buying index protection. Citi strategist David Chew succinctly summed up the core meaning of this divergence in last week's report: fund flows show a market that is polarized - short positions have been actively building up recently, while long positions from before have been maintained. This statement has been perfectly confirmed in the options market. The market is not worried about the fundamentals of a single company, but about the combined impact of interest rates, inflation, and valuation, causing sudden shifts in the correlation between individual stocks from low to high at the system level. Once macro factors overshadow individual narratives, the previously considered unrelated volatility will converge significantly in a short period, triggering a concentrated demand for index-level hedging. Susquehanna International Group's co-director of derivatives strategy, Chris Murphy, summarized it as: "People are not worried about the risks of hedging artificial intelligence stocks, but about the risks of rising interest rates." Retail investor sentiment sudden change: from buying call options to adding put options The change in sentiment of retail investors is one of the most indicative contrarian indicators in the market - and when it starts to reverse, the path is always steeper than imagined. Just over a week ago, retail investors were in a state of extreme frenzy chasing call options. According to data from Dow Jones Market Data, the five-day moving average of the Cboe put/call ratio dropped to 0.452, hitting the lowest level since March 30, 2022, signaling that retail investors had almost completely abandoned the notion of downside protection. Mark Arbeter, President of Arbeter Investments, pointed out at the time that this point reflected how volatile the sentiment of retail investors had become - almost everyone was betting on an increase, but no one was considering what would happen if it didn't happen. Today, the behavior of the same group has fundamentally reversed. The percentage of new put options opened by retail investors in large-cap tech stocks has soared from 15% to 27%, almost doubling. The most noteworthy aspect behind this change is not the numbers themselves - 15% to 27% still means that about 70% of the new positions are long - but the speed of the change. A week is enough for someone's investment psychology to switch from "I don't want to miss out on the rise" to "I'm worried that the drop will wipe everything out". More importantly, the change in the structure of positions is striking. On June 8th, the put/call ratio in the market climbed to 1.24, and the put side capital flow is extremely active. The open interest put/call ratio is rising simultaneously in the tech and semiconductor ETFs, while the implied volatility skew of put options is still rebounding from its lows - this means that even if the market continues to rebound, the normalization process of skew will passively reprice put options, significantly impacting the structural costs of hedging strategies such as put spreads. Path inference after the end of the "sugar rush" rally Before the sharp drop last Friday, market sentiment was in a state of near irrationality: FOMO sentiment was almost exhausted, and fear had been completely replaced by greed. Options market signals even quantified this extreme mindset - a little over a month ago, the Goldman Sachs Panic Index hit a nearly two-year low, and the options skew of the S&P 500 index also reached an 18-month low, indicating that put options were relatively cheap and call options were relatively expensive, with capital almost entirely favoring upside, completely ruling out the possibility of a steep decline. Ohsung Kwon, an analyst at Wells Fargo, mentioned that the "sugar rush stimulus" behind the recent stock market surge may have ended, making him "uninterested" in the stock market. Nevertheless, he believes that this sell-off - with both the Nasdaq 100 and S&P 500 experiencing significant declines - driven by position adjustments rather than fundamental factors, may signal a slowdown in the pace of rebound, rather than the beginning of a sustained pullback. The "sugar rush" rally has now been broken. Kwon summarized this as: "After everyone has been chasing highs and selling lows, the market lacks measures to hedge against downward risks. But now we see a reversal at the index level, indicating that investors are aware that the market may further decline."