The Standard & Poor’s 500 fell 1.29% at the close today, August 19. The NASDAQ Composite dropped 2.01%. The small-cap Russell 2000 lost 2.17%.
The drop in the S&P was the biggest daily decline since June and it took that index to its first weekly loss in five years.
The CBOE S&P 500 Volatility Index (VIX) rose 5.32% to move back above 20.
It’s tempting to say, Hey, it’s a Friday in August and everyone is at the beach.
But I think there’s more going on here than just typical selling before a weekend.
$2 trillion in options expired today leaving investors faced with a decision to either roll over existing positions or start new ones. The failure to break 4,300 on the S&P 500–the index closed today at 4228–looks to have discouraged long traders and opened the door to some short selling. Without momentum today, continuing to go long on options positions is relatively less attractive and the short-trade looks potentially more profitable. At least that’s how I read the day’s trading action. A basket of the most-shorted stocks dropped more than 6%, extending its weekly loss to 12% and giving short sellers their best week since March 2020. Among losses that would have made momentum traders nervous, I’d think, was the 40.54% drop in shares of Bed Bath & Beyond (BBBY), a meme favorite among retail momentum players. That loss comes after yesterday’s 19.63% drop in the stock.
But it’s also likely that traders might be a little nervous looking at next week. Nvidia (NVDA) reports earnings on Wednesday, August 24. The company has already warned that sales have slowed below earlier projections. Given all the warnings about a slowdown in technology revenue, it would be surprising if traders weren’t nervous about what the company will report. (The likelihood is, Wall Street being Wall Street, that the company will beat lowered earnings estimates from analysts–like Walmart (WMT did.) The other big news of the week will come from the Federal Reserve and its annual Jackson Hole conference. Fed chair Jerome Powell is scheduled to speak Friday morning and I’d expect that he (along with other Fed members) will stress the central bank’s resolve to fight inflation with more interest rate increases. That’s a potential issue for this stock market since investors and traders have put their belief (and dollars) in a quick end to Federal Reserve interest rate increases.