Barclays warns: It's time to guard against risks!

Barclays

According to Barclays' latest data, the equity timing indicator is deeply in the sell signal zone, indicating that the room for further index rallies and the risk of major declines are extremely asymmetric. This asymmetry is also the best timing to buy put options for protection.

Barclays believes that, due to this asymmetry, index put options are currently very cheap and their attractiveness is at an unignorable level. Although the spending on AI and the profit logic chain have not ended—and the AI trade is still ongoing—the current pricing and short-term positions have become too crowded, so it’s time to buy put options for protection.

So just how crowded is it, and how necessary is it to buy options protection?

Barclays traders point out that semiconductors now account for about 19% of the S&P 500 by weight. If you add semiconductors and technology hardware together, the weight exceeds 30%. This means that today's S&P 500 is no longer a diversified broad market index, but one increasingly influenced by the performance of AI, chips, and major tech hardware companies.

This creates a problem: if the semiconductor sector pulls back, it will not only drag down semiconductor ETFs but may also pull other sectors down. Because a large number of funds, ETFs, quantitative strategies, and institutional portfolios all hold similar leading stocks, if these stocks fall at the same time, index correlation will amplify, and volatility will rise accordingly.

Barclays particularly notes that such a pullback could also affect the Magnificent Seven. That’s because investors in AI trades generally don’t just buy single stocks, but rather the entire tech chain. If semiconductors begin to retreat, money may reduce overall AI risk exposure together.

In addition, Goldman Sachs partner Bobby Molavi recently stated that the world’s greed has overwhelmed fear. Optimism has overcome doubt. Prices are deviating from value. The index has risen for 10 consecutive weeks and 9 trading days in a row. In May alone, the S&P 500 reached a record high 11 times. For individual stocks, Arm rose 100% in 10 trading days, Dell rose 93% in 6 trading days, Intel rose 180%, Marvell, after Jensen Huang’s trillion-dollar advice, rose 32% in a single day and 10% after hours, and Sandisk is up 600% year-to-date.

Such concentrated and dramatic surges indicate that the current market trading range has surpassed expectations for a soft economic landing, rate cuts, and corporate profitability. Instead, it has entered a more powerful narrative rhythm. AI investment is accelerating, corporate profits are expanding, and capital inflows are increasing. Regardless of any short-term risks, they can be set aside for now.

However, all this good news is already priced in. The greater the rise, the more sensitive the market becomes to even slightly imperfect data.

Broadcom yesterday is an example. Broadcom’s earnings report wasn’t bad, but when the stock price has already fully priced in AI’s high growth, the market no longer focuses only on whether results are good, but whether they beat expectations.

So Broadcom’s decline is more like a reminder: AI leading companies can keep growing, but their stock prices won’t necessarily always track higher. The higher the growth expectation, if earnings don’t surpass the most optimistic forecasts, or guidance is seen as not strong enough, the market may punish the stock. This is what Goldman Sachs partners define as a profit-driven bubble, not a valuation expansion bubble.

Jason believes that the issue of long-short asymmetry and cheap put options was previously mentioned by Goldman Sachs; it’s just that they were a bit early and the market has since rallied for a few more days, so many viewers probably didn’t pay much attention.

Even though the market dropped today, objectively speaking, it hasn’t really fallen much. Except for Broadcom’s relatively serious drop, the Philadelphia Semiconductor Index SOX fell less than 3%. Compared with a year-to-date rally of more than 90%, that’s nothing.

But as Barclays and Goldman Sachs partners said, the market’s enthusiasm, greed, and expectations are now so high that the room for companies to make mistakes has been squeezed to the limit. If you don’t want to bear this narrow margin for error, then buying QQQ put options, or directly buying puts on semiconductor ETFs for protection, should at least provide more peace of mind.

Of course, options come with premiums, and protection comes at a cost. So the essence of this strategy is to exchange part of the gains for stability. For long-term investors, as long as you’re not investing in highly cyclical or obscure meme stocks, you don’t necessarily need to buy options for protection. You can simply hold steady and do nothing, which is also the ultimate skill for us retail investors to beat Wall Street.