Select Page

I love this headline today on Yahoo Finance: “Stocks post worst day since June.”

Since June!!

What else were you expecting in a rally that has become completely unmoored from any fundamentals in the real world.

Remember that when some talking head ties to convince you that today’s sell off was BECAUSE of a disappointing report on initial claims for unemployment today.

Yep, unadjusted claims SOARED to 833,000 from 826,000 last week.

And that led to today’s sell off? To Apple (AAPL) closing off 8.01% and Amazon (AMZN) dropping 4.63% and Alphabet (GOOG) plunging 5.00%, and Microsoft (6.19%)?

Come on! Give me a break!

You know what they say about market moves: When they’re too big to explain on the news, look to the structure of bets on risk in the options market.

Here’s where we began the day. Traders, not satisfied with gains of 1% or more a day on the tech heavy NASDAQ 100 and the big tech stocks like Apple and Amazon that drive it have been buying up call options to leverage their bets on this rally.

Last week traders bought 22 million more Call contacts (bullish leveraged bets on higher prices) in the options market than they did Puts (bearish bets on lower prices) Sundial Capital Research told Bloomberg. As stocks rose, dealers and traders on the other side of this trade–who had sold the all options and were thus on the hook to deliver the shares at the agreed price sometime in the future–bought shares to hedge their exposure. (Better to buy Microsoft at $215 today than to have to buy it at $250 in a month to cover that Call.) But the cover your ass bets didn’t drop there. Traders also hedged by buying options on the S&P 500 and the NASDAQ 10. The Vix, the vitality index on the S&P 500 soared, but the VXN, the CBOE NASDAQ 100 Volatility Index, rocketed even higher with the gap between the VIX an the VXN climbing to 10 points, the widest gap in the last 16 years.

What you saw today, on the very minor “real world” news from initial claims for unemployment, was the unwinding of some of that leverage. Traders who had leveraged themselves to infinity and beyond on a further rally in tech names sold either to take profits or to prevent those buys off Call options turning into traps that would devour profits from the rally.

There wasn’t a lot of conviction in these leverage bets–just faith that stocks at lifetime highs would go higher.

So when prices turned against these bets, the bettors sold.

And they sold not the weakest stocks but those where the leverage bets had grown the largest.

So Nvidia (NVDA) was down 9.28% at the close. Twilio (TWLO) 5.91%. Skyworks Systems (SWKS) 8.73%. SolarEdge Technologies (SEDG) 11.29%. Teladoc Health (TDOC) 9.03%. Sunrun (RUN) 10.38%.

As you’d expect from this market of extremes, for some stock this was a 10% correction in a day.

Now, of course, the question is what happens tomorrow?

Nobody’s resting easy tonight, And with the August employment report due before the open and with the long Labor Day weekend ahead, I doubt that many traders are placing big buy orders for the morning open. Just too much uncertainty.

BUT I do think that it will take more than one 800-point plunge to break the market’s faith in the Powell Put. With 10-year Treasuries at 0.70% and the economy barely chugging along and with disappointing news on growth, where are investors and traders going to put all the cash that the Fed is pumping out? Tech stocks will still be the investments of choice.

Maybe not tomorrow (literally). But probably next week. Buy on the dip anyone?

Which isn’t to say that today’s 800-point drop in the Dow and whatever selling might happen tomorrow doesn’t have a lasting effect on this market and this rally. Every plunge like this makes traders more nervous. It’s like an sudden injury that leaves the site more sensitive to future pain. After a day like today, traders will be even less likely to grant the market or any sector or any stock room for a mistake. Sell on anything like a rumor. And sell on the whiff of a rumor.

Days like this reset the market’s trigger.