They can’t both be right.

Below the surface of the calmest stock market in five decades, a divergence in sentiment has opened in which institutional investors are surrendering hedges and diving deeper into stocks, while individuals load up on protective options and sell equity funds. Bets are piling up at the fastest rate ever as stocks meander, setting the stage for pain when the sleepy spell resolves.

The trading reflects a bigger picture in which professional investors warm to an advance that lifted the S&P 500 Index almost 20 percent since February, even as individuals are unconvinced. Chris Bouffard, who oversees $10 billion as chief investment officer at Mutual Fund Store in Overland Park, Kansas, says this time the pros have it right.

“The reaction throughout this year is realizing the Fed is going to be lower for longer than even the most dovish people thought,” said Bouffard, whose firm anticipated the rally in riskier assets like high-yield bonds and emerging-market stocks this year. “If you’re retail without the research and insights into the fundamentals of the economy and geopolitical events, you’re at whims of headlines, the emotions and sensations that come from them.”

The depth of the divide is illustrated in options markets, where institutions are bailing out of bets volatility will increase while smaller investors embrace them.

On futures exchanges, venues dominated by hedge funds, bulls are going all in on the end of market turbulence. Net short positions in the CBOE Volatility Index reached a record this month, Commodity Futures Trading Commission data show. At the same time, net long positions in contracts linked to the S&P 500, Nasdaq 100 Index and Dow Jones Industrial Average totaled as much as $57 billion, the most in CFTC data compiled by Sundial Capital Research Inc. since 1986.

Equally enthused are retail investors whose appetite is growing for exchange-traded products tied to levels of equity swings. Take the iPath S&P 500 VIX Short-Term Futures ETN, the biggest security tracking the volatility gauge, a position that amounts to a stock-market short. Outstanding shares have exploded 11-fold since January to an all-time high this month, and the note took in $816 million of fresh cash in July, the most since 2012.

With conviction running high, open interest on SPDR S&P 500 ETF options -- both bullish and bearish -- climbed above 27 million contracts earlier this month, the most since 2011. Outstanding calls and puts have averaged about 18 million since the start of the bull market.

Big Disagreement

That Wall Street should disagree with Main Street is nothing new, though the discord has rarely been this pronounced. For individuals, withdrawing money from stocks has meant missing out on a rally that restored $3.7 trillion to U.S. share values since February -- though a similar bout of prudence paid off before the rout of last August. Professional investors bore the brunt of that selloff, in which the S&P 500 posted its first 10 percent drop in four years, and have been beneficiaries of this one.

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