Experiencing fear of falling overwhelms the need for safety. Hedging and selling stock options plummet, reducing insurance costs. Analysts: the market has not yet fully transitioned to being bullish.

Caution has become Wall Street's most expensive mistake. This week, US inflation data is hot, with the annual inflation rate climbing to the highest level in about three years. At the same time, tensions are rising in the Persian Gulf region, and expectations that the Federal Reserve may maintain a tight monetary policy continue to ferment. However, US stocks continue to extend their longest weekly winning streak since 2023 and reach new highs. Junk bonds are rising, oil is falling, while the cost of insurance to guard against market sell-offs has dropped significantly. The rally in risk assets is not due to investors' strong confidence, but rather due to the rising cost of staying on the sidelines. Investors who have been skeptical of the market rebound for months now find themselves significantly underweight. The S&P 500 index has continued to rise since its March low, with corporate bond spreads narrowing to near multi-decade lows, and short positions being squeezed. In several options markets, the fear of missing out on the next rally seems to outweigh concerns about market downturns. This decline in risk aversion is most evident in the options market. Measures of the cost of protection against selling have fallen to their lowest levels since early 2025, while the cost of protecting against a sudden crash has fallen to the year's lows. Meanwhile, demand for call options, especially in the semiconductor sector, remains strong, highlighting the fact that market optimism remains highly concentrated on winners in the artificial intelligence sector. However, despite the return of risk appetite, investors have not fully committed. Barclays pointed out that hedge funds and trend-following funds have rebuilt their stock exposure, but pure long positions have cooled off, retail participation remains low, and a significant amount of cash remains on the sidelines. While the market may seem slightly crowded in some areas, it has not reached a full-on bullish level. Meanwhile, as protective tools that can mitigate market declines are being stripped away, economic data is beginning to soften, consumer confidence is weakening, income growth is slowing, and April new home sales are declining. However, thanks to rumors of a possible agreement between the US and Iran, despite President Trump not confirming it, US stocks continue to close at record highs. Michael O'Rourke, Chief Market Strategist at JonesTrading, said, "The key to the market right now is that Trump does not want to escalate large-scale military action. If the agreement is rejected, the market will simply continue to wait for the next round of negotiations. But if the president restarts major military action or oil prices rise significantly, the market will react negatively." If the ceasefire agreement is maintained, oil prices fall, momentum shifts from a few leading sectors to a broader base, there are almost no investors willing to be the last "holdouts." The question is whether the market is becoming more confident about the future or is becoming increasingly unwilling to pay the cost of protection against "making mistakes." The S&P 500 index rose 1.4% this week, rising for nine consecutive weeks, the longest winning streak since 2023. As oil prices and inflation fears ease, US Treasury bonds have seen their best single-week performance since the start of the war with Iran. Brent crude oil fell to $92, and volatility in almost all assets has significantly declined. Short sellers are suffering the most, with a basket of shorted company stocks compiled by Goldman Sachs soaring more than 30% in two months. The same sentiment has spread to various markets, whether stocks, credit bonds, or options, with investors demanding lower compensation for the risks they are taking. As the market continues to rise, the willingness to insure against it continues to decrease. The premiums paid by investors to prevent a sharp market decline have fallen to levels not seen since January 2025, and the demand for protection against deeper tail risks has also dropped to year-to-date lows. Amy Wu Silverman, Head of Capital Markets Derivatives Strategy at Royal Bank of Canada, said, "Many people believe that even if the market really falls, it will be bought into. This is tricky. The old saying goes, 'Hedge when you can hedge, not when you have to hedge.' The problem is that, although skew might look cheap, it will only get cheaper." Capital is flowing in the opposite direction. Data from Nomura Holdings shows extreme demand for upside options positions in the $680 billion VanEck Semiconductor ETF, with investors paying exceptionally high premiums for out-of-the-money call options, despite the prolonged rally. For traders responsible for pricing these trades, this buying behavior appears more like chasing, with fund managers who previously doubted the rebound busy covering positions they never had. Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna International Group, said, "Traders are clearly chasing upward protection, but this is not indiscriminately buying call options, it's the cost of exposure to the upside tail risk after being exposed insufficiently during the AI-led rally. My interpretation is that investors are no longer just hedging downside risk, many are now hedging the risk of 'missing out on the next rally.'"