Volatility in U.S. stocks has risen significantly in recent weeks, with traders increasingly wary of any signs that the U.S. economy is cooling faster than expected. The S&P 500 is down about 3% from its peak in late August.

UBS AG’s chief U.S. equity derivatives strategist said she expects the S&P 500 to fall at least 10% from its peak over the next month.

The stock market is in a state of tension. Black line: VIX index; red line: S&P 500 index

“I am tactically bearish on U.S. stocks over the next two months, as any upcoming economic data that is even mildly disappointing could trigger a significant decline,” Rebecca Cheong wrote in a note to clients on Tuesday.

She recommends investors buy tail hedge funds to protect against losses, and lists the iShares Russell 2000 Index ETF (IWM), the SPDR Financial Select Sector Fund (XLF US), and the iShares iBoxx High Yield Corporate Bond ETF (HYG) as top picks.

Cheong added that while her view reflects an increasing pessimism in the market, it is not a long-term view. “If there are no news events, the market will probably continue to see only moderate selling,” she added.

Other strategists are also taking a cautious stance in the short term, such as Christian Mueller-Glissmann of Goldman Sachs Group Inc., who said in a Sept. 9 report that risk-adjusted returns for stocks will decline by year-end, but that a bear market for the S&P 500 is unlikely.

He said U.S. stocks are unlikely to plunge 20% or more because the risk of a recession remains low and the Federal Reserve is expected to cut interest rates.

The team led by him said that although the stock market may face more risks of pullback before the end of the year, hit by rising valuations, mixed growth prospects and policy uncertainties, the possibility of entering an outright bear market is small because the economy is also supported to some extent by "healthy growth in the private sector."

In addition, the strategists’ historical analysis shows that the frequency of S&P 500 declines of more than 20% has decreased since the 1990s, driven by longer business cycles, lower macroeconomic volatility and “cushions” from central bank policies.

In the report, they said they remain tactically neutral on asset allocation but are "mildly supportive of risk-on" over a 12-month horizon.

Separately, data from Citigroup Inc. showed a "bearish bias," suggesting that major U.S. stock indexes are vulnerable to further declines in the near term.

Article forwarded from: Jinshi Data