Big speculators, a year along in a frantic campaign of risk reduction, are getting even more cautious ahead of a duo of potential make-or-break market events this week: midterm elections and the government’s inflation report.

Hedge funds that make both bullish and bearish equity wagers just unwound bets at a rate that was in line with the fastest this year, according to data compiled by JPMorgan Chase & Co.’s prime broker using a 20-day rolling window.

The process, known as degrossing, also played out among Morgan Stanley’s fund clients, though the pace slowed at the start of last week. Still, at 178%, the group’s gross leverage, a rough measure of long and short positioning among clients, sat in the 6th percentile of a five-year range.

Fast-money traders are finding little to get excited about in a market where the S&P 500 has been stuck in a 200-point range in recent weeks. While seasonal patterns around midterm elections historically boded well for stocks, a strong grip by Democrats in Congress could raise the odds of fiscal measures, a move that’d further embolden a hawkish Federal Reserve. Meanwhile, the market’s big reversal following the last release of the consumer price index is enough reason to pause. 

“I’m not willing to take the headline risk one way or the other,” said David Reidy, founder of First Growth Capital LLC. “There’s too much up in the air especially with the elections and the CPI print to be fully into any particular directional trade.”

The trepidation is echoed in the options market. One measure of implied volatility for S&P 500 contracts showed a roughly 40% increase through Wednesday, a period that covers the US elections and ends right before the inflation update on Thursday morning. That means, traders are willing to pay up to hedge against any potential turmoil around these catalysts.

“These are high-gamma events and highly volatile times in the marketplace,” said John McClain, portfolio manager at Brandywine Global. “You don’t want to be caught off sides.” 

Intraday reversals have become a hallmark of this year’s market as investors try to navigate conflicting data and narratives. While data on manufacturing and housing indicate an economic slowdown, a tightening labor market suggests consumer resilience. The Fed is set to ease off in the pace of its most-aggressive tightening campaign in decades next month, though the peak interest rate is likely to be higher than originally expected.

The S&P 500 has wiped out 1% intraday gains or losses 26 times this year, on course for the highest annual reading of daily turnarounds since the 2008 financial crisis. The index staged a 5% rebound amid a hot CPI print on Oct. 13 and then erased a 1% gain last Wednesday, when the Fed announced its policy decision.

All highlights the danger of being caught out in a whiplashing market. Amid the heightened volatility, traders flocked to options that expire within 24 hours either as a way of protection or chasing the market.

For hedge funds, whose returns have beaten the market’s thanks to short sales, being defensive continues to be the game plan. This time, however, the makeup of the degrossing is different from the episode in earlier August, with the reduction in the long book being the main driver, as opposed to short covering, according to JPMorgan.

Amid the dramatic volatility in both directions, however, is a market that’s stuck. The S&P 500 has mostly been capped between 3,700 and 3,900 since mid-October. It closed just above 3,800 Monday.

“Overall positioning levels remain very low,” JPMorgan’s team including John Schlegel wrote in a note last week. “But with macro and micro data seemingly uncooperative, it’s hard to expect this to drive markets higher in the near term as the fundamental backdrop for markets remains challenged.”

--With assistance from Isabelle Lee.

This article was provided by Bloomberg News.