If stocks made a sudden connection to the worst economy in a lifetime, after having been disconnected for months, that would be a disaster, however.
By Wolf Richter for WOLF STREET.
If you’re invested in Apple, Tesla, or many other stocks for which not even the sky was the limit, it has been a little rough over the past few days. But don’t worry, a new meme is circulating on Wall Street of why this time, it’s different – of why this time, there is a geeky reason for the selloff, having to do with call options, and with Robinhood traders needing to get wiped out. And after this process is over, since this was the only reason stocks swooned in the first place, their ascend can continue.
Much worse, so the meme goes, would be if the markets are suddenly reacting to the worst economy in a lifetime running on fumes of stimulus, or to the worst unemployment crisis in a lifetime, or to corporate revenues and earnings getting hammered, or to all simultaneously. Stocks reacting to and reflecting reality would be the worst-case scenario. But that’s not happening, the meme goes; it’s just a technical issue that will go away.
The “Heard on the Street” column in the Wall Street Journal summarizes up this meme, that “this type of selloff” – due to these call options undercurrents and Robinhood traders getting wiped out with their call options – “could be good news for tech stocks.”
It explains: “Unsophisticated investors getting burned with complex instruments are a less worrying cause for the rout than a change in the firms’ earnings prospects.”
So here we go for the fun of it, descending a few inches deep into options geekdom and why the Robinhood options traders are now considered the sacrificial lambs that, after they’re sacrificed, will allow all these still ludicrously overvalued tech stocks to rise again during the worst economy in a lifetime.
This theory is based on the huge jump in options trading, and particularly of call options linked to the biggest names that are on everyone’s lips.
Buyers of call options gain the right, but not the obligation, to buy the underlying shares at a predetermined strike price by a predetermined expiration date. If the option is exercised, the writer (seller) of a call option is obligated to sell the underlying shares at the predetermined price to the option buyer.
This is a risk for the writer of call options, and the writer is paid to take on that risk via the premium. These writers are financial institutions, banks, and the like. Writing call options provides an income stream for them. But to hedge against that risk, writers buy the underlying shares when they write the call option – and that’s the feedback loop between call options and underlying stocks and their prices.
So far, so good. If option volume isn’t huge, and if the volumes of call options and put options (which serve the opposite function) are not too far apart, there is not a huge impact on the overall market.
But that hasn’t been the case recently. Equity option trading has been huge in recent months, and heavily skewed toward call options: According to Cboe data cited by the WSJ, call options volume has soared 68% this year, compared to a 32% increase in put options, and the gap between the two is now the widest since 2010.
“Individual investors have entered this complex market lured by brokerages, which make more money on derivatives trades,” says the Heard on the Street column. “This year, retail trading app Robinhood has been a particularly popular entry point for amateurs investing their federal-stimulus checks. Earlier in 2020, this trend appeared to drive several market moves.”
So, the meme goes, Robinhood traders flush with stimulus money, or whatever, were plowing into call options to benefit from this market’s supernatural rally in the middle of the worst economic crisis in a lifetime. In turn, financial institutions which were selling these large volumes of call options were buying large volumes of the underlying shares to hedge against the risk. And this feedback loop has contributed to the rally in share prices while it was still going on.
But the meme goes, as the “Heard on the Street” column puts it, this type of rally “can unravel quickly at the first sign of trouble.”
Unravel, check. So now what?
Blowing out those Robinhood call-options traders and wiping out their accounts will reset the rally of sorts, the meme goes. Once that wipeout of those folks – for Wall Street, is there even a more maligned group of people out there? – is out of the way, the rally in tech stocks can continue. Hence, as the Heard on the Street column concludes, that “this type of selloff could be good news for tech stocks.”
Any theory – even one based on wiping out these sacrificial lambs trading at Robinhood – is better than seeing the absurdity of having had the biggest stock market rally leading to record stock prices during the worst economic crisis in a lifetime.
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RobinHood speculators now learning the meaning of the word “trader”
Peasants don’t understand how bailouts work in this here country. Next they are going to find that RE doesn’t always go up and 120mo auto loan is a bad idea!
Lots of people should have learned that RE doesn’t always go up in the Great Recession Obviously everybody forgot
They’re called “brokerage” accounts because they leave you broke!
Stealing that. Improving on it, actually. ‘Brokerage’ = ‘Broker Rage’. Raging against the broker who just whipped away that magic 60k ‘profit’ :-) :-)
Wolf, could you break down this complex stuff about Softbank rigging the market using tools that measure “gamma”. Wtf is this all about? Most of us hearing about this through Zerohedge or elsewhere are not savy about these things
Raymond Rogers,
The Softbank deal – if true (just rumors so far, even if they’re in the FT and the WSJ) – would have a similar effect and pull in the same direction.
Softbank’s $4 billion in options gave it $50 billion in exposure to underlying stocks. Apple alone is worth $2 trillion.
The interesting thing is that the meme I’m talking about above is now switching from Robinhood traders to Softbank … that’s now the meme. Softbank did it, and so the selloff is just a technical issue, the meme says.
It wasn’t trying to rig the market. It was trying to make a buck on the market. And that is the problem for a long-term investment fund. They’re not supposed to be hedge funds, they’re not supposed to go to the casino, they’re supposed to make long-term investment decisions and commitments.
How any one can make ‘ long-term investment decisions and commitments ‘ with the current monetary policies of Fed?
Momentum traders have won over rational investors ‘trying’ to make ‘long term investment ‘decisions! Very low price of capital, along with QEs, stimulus have completely destroyed the normal matrix of sane investment.
This is a legal casino trading run by Fed!
El Erian said it pretty good that the market is priced on technicals not fundamentals. At some point it will rotate to being priced on fundamentals and it’s going to have a different price
You can run a discounted cash flow of sp500 dividends and you get future return over the next thirty years or so of around 2%. You can compare that to other investments and maybe you just decide to sit in cash and precious metals til things reprice if you don’t want to play in the casino.
@old school
Per John Hussaman and also by (diceased) John Bogle the S&P return for the next decade is more likely NEGATIVE! Future growth/earnings have been brought front!
Warren Buffet’s famous mkt indicator Mkt CAP to GDP was close to 180% on last Friday – a record in mkt history! PE of S&P was 27.3!
If NOT for easy-[easy money of 3 Trillions from Fed since March 23rd, where would be mkts today? Will that spigot kept open going forward?
I will reply here. I agree with you maybe negative over the next 10 years. I was just using a simple perpetual model and using 3% nominal growth which is roughly what some are predicting as new normal for growth I get just a little under 2% perpetual return on stock market from these levels. These perpetual models are input sensitive but kind of gives a mathematical reality to current stock market.
Classic pump and dump.
PPP/PUA done as well according to my source. I always figured that was structured to end before the election and following November NFP. Unemployment will surge in October.
PPP looks done. PUA is not done, not yet at least.
“Unemployment will surge in October.”
The headline UE number from the BLS won’t reflect that. I expect that number to be less than 7%, reality be damned.
You would think we would have more than just a stock market bubble to show for the $26T in national debt and $7T on the Fed balance sheet. (Whatever happened to a “chicken in every pot”?)
To me it’s common sense. If you believe in elastic fiat money and believe you can print yourself out of every situation, then you are going to eventually blow up the system by printing too much. It encourages toouch Fisk taking.
…oops. too much risk taking.
The FED can’t just print Broad Money. They print Base Money (Bank Reserves) and to get into the Broad Money Supply it has to be ‘loaned out’ by loans or credit card expenditures.
So, when everyone is not spending or borrowing how is this Base Money going to get into the Broad Money supply???
Unless the Federal Reserve Charter is amended by Congress the FED can’t ‘print money’.
They FED can’t create inflation either. All they can do is lower the FFR and do more QE- which is actually deflationary (see Japan).
Steven Van Metre says (& I agree) the FED was designed as a Deflation Killing Machine. Other CB are not as constrained as the FED is under the Federal Reserve Charter as it currently exists.
I think Dr. Lacy Hunt is right: we are going to see real deflation before we see any inflation. YMMV.
Additionally, if inflation does actually manage to rear its ugly head interest rates will rise. Seriously, does anybody actually think that with all this insane debt the FED and the Government actually wants to see, or can afford, interest rates rising?
Look, all these fucksticks wanna do is kick the can in perpetuity till their term is up and they can pass the steaming turd to the next Ivy League “intellectual, yet idiot” as Nasim Taleb calls them.
You can’t get too involved in analyzing narratives for equity markets. Most of them never stand even the most basic logical scrutiny, they are written for medicinal purposes to calm the nerves of traders, by shamans and vudu artists, spurred on enthusiastically by a cultist egocentric belief in their own power and place in a society from where they derive other irrational ideas, that leads them to believe that it is their journalistic duty to provide calm to the markets in times of panic and not speak the truth. Such idiocies have always existed in the market commentary and they don’t make any difference, as soon as the price action changes these narratives change too, so these journalist can pretend they matter and get a month’s salary.
Now that actually makes sense.
Journalist – “you keep using that word… I don’t think it means what you think it means… ” :D :'(
Sir, yes Sir!
I wonder what ‘unsophisticated investor’ really means? Lots of code words and phrases in the economic reports (like Heard On The Street) cited in this article. It reminds me of George Carlin talking about the American Dream, or Warren Buffet on the sucker is you.
Harry Callahan : “A man’s GOT to know his limitations.” (Dirty Harry).
Geesh, missed a pun and double entendre. Should have been…Herd On The Street.
First book I ever read on investing 35 years ago said you don’t need any fancy instruments if you are a typical retail investor.
Just stocks, bonds, cash and a home.
Did anyone expect a full V recovery for the Dow to hit 29.5k again? Has there ever been a previous time in history where the dead cat bounce actually passed the previous high? My guess is probably not.
If the Dow crew were good stock pickers, they could have shuffled out the right names to put into the 30 and hit 29.5k by now. Or maybe there are not 30 good stocks left? It just goes to show.
I think Wolf should wait until the trading day is done to post articles like this. And also maybe read the BLS August Jobs report, 8.4% unemployment. V-shaped recovery. He’s pushing a very doom and gloom narrative.
Neal,
Sour grapes because you’re down today and a little yesterday and perhaps over the past few days?
The BLS is BS. There are 29 million people receiving unemployment insurance under state and federal plans. That’s 18% of the labor force. We know this because states submitted this data from their unemployment offices that process these claims. This data is harder to just make disappear because the states know what they submitted.
https://wolfstreet.com/2020/09/03/big-setback-for-the-unemployment-crisis-week-24-of-u-s-labor-market-collapse/
So now, I just blow off the BLS, which completely contracts the Labor Department. I no longer waste my time or my readers time with the BLS’s BS. I focus on the unemployment claims because they’re not survey based, but money (transaction) based. There are plenty of issues with them too, but at least there is a documented record for each claim.
How is the greatest global economic contraction since WWII not a doom and gloom scenario?
@ Neal and @ wolf
Mish shedlock has thrown the ‘cold’ water on the narrative of recovery by BLS (BS!?) report
Huge Discrepancies Cast Doubt On the Better Than Expected Jobs Report – mishtalk
Jobs Report Much Better Than Expected, But Is It Believable?
-Mishtalk
Are you implying that Wolf is moving markets?
By the way, the truth is not gloom and doom. It’s the truth.
Nope, Petabyte, you’re probably right.
But imagine dropping that dead cat onto a stimulus landmine.
A few parts of the ? are going to fly real high…
Hahahaha! I love cats!
Actually there have been such times, during inflationary times. The best such example is probably the 1966-1982 inflationary bear market.
Adjusted for CPI inflation, the Dow peaked in early 1966 and hit bottom in May 1982. But in nominal terms, the DOW revisited the 1966 highs over and over again, with nominal intermediate tops in 1969, 1972, and 1976 all within a couple percent of the 1966 peak.
TimTim’s explanation sums it up pretty well – when the deflationary dead cat lands on a money-printing landmine, the updraft can carry it pretty high.
So to summarize.
Bad news is really good news.
Good news is really bad news.
Unless the bad news is really, really bad news.
Then bad news is really bad news
And…
Don’t play options with the rent money. Even in an eviction ban.
So to summarize:
1. Any news moves the market
2. The news will be made to move the market
3. Most of the news isn’t true
4. The news will fit the needs of the ones needed to move the market
5. The big money is the one that needs the news.
HFT and huge accumulations of wealth (ie cash) into a few hands can manipulate and move the markets. You don’t need billions and billions thrown across the market, but a select amount of money to hit the pressure points at the right time and watch out.
Volume used to mean something as a market indicator in individual shares. With HFT and front running it now means nothing, but wacking the bid or ask at the ‘right times’ can and does move the markets.
Pull up a daily chart of the silver contract and see the bids and asks being hit – clear as day (night) light for a good example.
‘The big money’ money is in charge of narrative of that NEWS!
The retail apparently swallow that with no questions asked!
The script for next 2 months is full of uncertainties of various types, unlike any time since March 23rd when the mkts got boost from a gift of 3 trillions from Fed!
Bear Mkt
Lower of the highs and lower of the lows!
Could this horrible pandemic be the catalyst that catapults the world into a new age of ‘Virtual’ality’ and AI…an age much predicted and expected over last 40 years but only grudgeingly applied until now — hence the ‘blow-up’ in the virtual entities…PJS
October 2010 Nasdaq 2100
02.09.2020 Nasdaq 12400
04.09.2020 Nasdaq 11600
Correction?
I don’t think so.
topcat,
Did anyone say anything about a “correction?” I don’t think so. The term used is “selloff.”
Also could be known as good old fashioned profit taking.
With uncertainties of so many kind ahead, in the next two months, it is NOT just profit taking. More volatility is guaranteed all the way to election day + another 2 weeks!
Btw. All the bear mkts began with corrections historically. March bear could have been real deep and damaging if not for 3 Trillions gift from Fed! Can Fed meet the Covid 19 challenge?
Talk of vaccines before the end of the year is a joke but hopium narrative from Wall St to DIP buyers!
It’s simple. The move this week is not a “ correction”. It is actually a normal swing that happens usually every month. Stocks will kiss the 4 ma. The problem was the totally WTF batchit
Move up into unreal nosebleed territory. So much farther to fall. Always amusing how there is always a sane reason for the crazy lift. But the conspiracies abound on the fall. The scary thing is. Indexes have so much more to fall to actually enter correction land. Buckle up
Dunno about this meme. Uncle Sam sent out about $218B in stimulus checks. Assuming everyone who got a check opened a brokerage account and leveraged it 5x over that’s $1T, about 3% of a $34T market.
Nah. ……We spent ours on new iPhones. Why not, we are retired and over 70 trying to live a little.
I spent some of mine on women and drugs. The rest I squandered.
Looks like Softbank was the options whale. Robinhood traders likely relative minnows in comparison, even in aggregate.
Wolf – Your closing sentence nails it: “Any theory… is better than seeing the absurdity of having had the biggest stock market rally leading to record stock prices during the worst economic crisis in a lifetime.” You can drop the mic and walk off stage. There is nothing more to say. The emperor is in fact not wearing any clothes, and our eyes are seeing what they are seeing: naked financial insanity. Meanwhile, here is the subject line of an email that I received from JP Morgan private wealth group just today at around noon Eastern time: “We are more optimistic. Why you should be, too.” Seriously?
If the observations don’t fit your theory, you have to revise your theory. Not blame the observations on “insanity”.
Stock prices, in dollars, reflect the relative supply and demand of precisely two things: shares of stock, and financial credit (dollars).
If stock prices are soaring DESPITE horrific valuations, that tells you that there’s far too much credit seeking to get out of dollars and into something else.
Bond prices are likewise insane, no one is being rewarded net of inflation, and term premiums don’t reward any risk either.
You can do this for asset class after asset class. It’s still the Everything Bubble run amok. You don’t have to love it, but you can’t leave it.
‘You don’t have to love it, but you can’t leave it’
When the valuations are beyond ‘nose bleed’ levels, one can start the exit plans with increasing ‘tail insurance’ (hedging) and increasing cash. Volatility is traders’ heaven! More volatility guranteed ahead!
Ideal for ‘swing option trading’
(Been in the mkt since ’82)
This surreal mkt bubble will meet the same fate of the previous two!
Covid 19 is/was just a trigger.
‘Those who ignore the past are condemned to repeat it’ – George Santayana
There is no exit. Everything is overvalued. Even cash loses value during the inflationary depression along with everything else. That’s why the 1970s were such a massacre for Old Money, leading to the New Money leadership of the 1980s & 1990s who are now today’s Old Guard slowly dying off.
I like Hussman’s simple premise that the Fed prints dollars and buys assets putting trillions of zero interest cash that is a hot potato looking for a return. As long as assets are going up people don’t want to hold the cash. Once asset prices go down enough to hurt people will be selling to try to get the cash they need to survive.
“Stock prices, in dollars, reflect the relative supply and demand of precisely two things: shares of stock, and financial credit (dollars).”
Or, in another time, the relative supply and demand of tulip bulbs.
When you start hearing “it’s different this time”, “tons of money waiting on the side lines to jump in”, “the Fed will never let the market go down”, “valuations do not matter because we have entered a new era of investment and fundamentals are for old dodgy farts like XOM and do not apply to technology. And my favorite of all time, ” We have entered into a new paradigm of investing where synergies are unlimited in ways we do not now fully understand”. I have a list of these I started in the dot-com bust. The last one was from a “tech guru ” one week before Copper River bit the dust. He also was an “expert “on CMGI. I just filled up my generator tank for the winter and my truck at the XOM station . Real useful stuff at a price I can afford that’s sloshing around in my tanks even if XOM PE is not 200+.
Have you got an Exxon word processor to chock your wheels? They lost $1B back in the early 80’s trying to get into tech.
Ienert. As a chemist I worked for Exxon Enterprises during the 80’s .ExxonEnterprises was the tech. division of Exxon of America. It was a big beautiful govt tax hole for Exxon to fill . And fill they did. They still are selling gas ,and I still use a type writer (electric) , for letters.
Morning…your comments reminded me of the IC design/mfg operation that was set-up in Cupertino,CA for state of the art technology . ??
” We have entered into a new paradigm of investing where synergies are unlimited in ways we do not now fully understand”.
LOL, you just made my day with that memory!
I don’t think the Robinhood traders play anything near the role being ascribed to them by gaslighting media complexes.
Multiple sources are blaming the past week’s mini-bubble and mini-crash on SoftBank.
Wrong.
Robinhood account holders 10 times more likely to trade options than any other brokerage.
The company itself also derives huge revenue from these option trades – also 10x more.
https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html
As for volume: there were 13 million Robinhood accounts at the end of 2019. More than Schwab, more than Etrade.
$1000 traded by each Robinhood = $13B; in reality, people are putting more because they’re young and stupid (average age 31, little to no previous experience).
I see Robinhood as an extension of video gaming. It’s cheap, $1 will buy you a fractional share of anything, and you can stay connected 24/7. Add to that Las Vegas being shutdown and it’s the perfect storm.
The real problem for Robinhooders will come if the state of NJ goes through with their threat to tax HFTs at 25 cents each, killing off HFTing. Now that will really kill the market.
“……….if the state of NJ goes through with their threat to tax HFTs at 25 cents each, killing off HFTing. Now that will really kill the market.”
HFT should have never been allowed, ever. It allows those with more capital and access to exotic computers and alogs to game the system among themselves tot he detriment of ordinary market participants and takes fundamentals out of the picture.
There should be a tax on HFY at the FEDERAL level as the people doing the HFT can move around between the states with their hardware and software.
Can’t remember when the ASX allowed that crap to take place here, but we also have a different version of the trading going on.
These big boys are allowed to undertake trading a less than full orders and drip sales into the market.
They even do it with illiquid shares selling in the ten cent area and not included in any market index..
I remember watching this happen to a company traidng at 12.5 cents per share with a few buy orders down to something like 7.5 cents. The programmed trading would drop 50, 75, 57, 235, etc share into the buy queue and forced the price down.
Yep, the company’s market value plummted by 40% on trades with a total value of less than $A500.
Lee,
Since anything on a computer is easy to manipulate, HFT is market manipulation codified. The proposed tax rate from the NJ gov is a big indicator that he has no idea what he’s proposing. A penny tax may reduce the frequency of trades but 25 cents is just another govt shutdown by an idiotic politician.
BTW has anybody noticed that the symbol for cents is no longer on keyboards. I was looking for it…and it’s gone. Inflated away?
Using a physics analogy all of this trading is friction that doesn’t add wealth to the investing public. Last time I checked it seems like a lot of stocks change hands every 30 days. If people were really doing fundamental analysis of company performance then stock turnover should be years and not days. That probably means 95% of stock trading is just betting on price movement or the wiggle in the line.
HFTs create the illusion of liquidity better than any Fed typist. Is there anything behind that liquidity? Corporations buying back stock, and traders and investment banks front running the action, all fueled on debt. This is the most transparent stock market I have seen. Anybody can make money and do it using risk adverse methods. Egalitarian participation is a positive. Making a few bucks on stocks may be all that keeps a few of us going.
I don’t agree.
The ease isn’t the issue. Trading stocks, options, whatever has never been difficult for those who are the least bit interested.
I traded options as a 14 year old – decades ago.
What is happening now is on the coordination side: the robinhooders are naive patsys who are furthermore coordinated by social media.
In the past, the herds would move but would move a lot slower and less focused because the only way they could focus was via the diffuse mainstream media channels.
Today: between Twitter, Facebook, Telegram and other channels – it is easily possible to coordinate thousands of robinhooders to trade almost simultaneously. This easily replicates the capability of even mid-size hedge funds to move the market all of itself. Any such moves are then amplified by day traders in the more traditional style.
And of course, it seems the outright manipulation via social media which a number of CEOs engage in is apparently not illegal – or at least, not prosecuted by the SEC.
Seen in this light, Musk’s behavior is a lot more understandable: it is more than possible that it is pure PR to hook in the robinhooders.
I still think you swallowed the gaslit kool-aid.
Retail as a whole is kinda-sorta big, but totally uncoordinated. And Robinhood alone isn’t hosting enough money. Number of accounts isn’t the whole story, the size behind those accounts matters too.
I could see Robinhooders leading the Kodak Moment that we had a few weeks back, but to pull the entire tech sector up by the options this week? That took a concerted effort by some bigger players. And SoftBank’s already been flagged.
In fact, I’d argue that SoftBank was trying to wag the Robinhood crowd and then exit, in a classic bull-trap play, but the way the market folded says SoftBank shot itself in the foot instead. The lack of retail follow-through indicates that Robinhood isn’t that big of a player yet.
Wrong again.
The coordination occurs via Twitter feeds, Facebook posts and Telegram.
The precedent was set with the pump and dump channels on Telegram during the peak crypto boom (which we’re not coincidentally back again).
Sounds like maybe they should have named the Robin Hood app, the “Muppet” or “Kermit the Frog” app to signify the term Goldman Sach’s used back in 2008 for the fools they wiped out to benefit their own accounts. Only on Wall Street can they see ordinary Americans on Main Street being wiped out as a good sign for the future of the markets.
Sorry, double post in error.
I bet Dave is regretting that decision to become a Level 60 Wizard and watching cat videos instead of attending to his puts and calls.
Maybe, but they use leverage, exotics, and don’t spread it around the market, but target only a few shares and then it will have an impact on those issues as does any trading at the margin.
Wonder how much they actually made or lost on the play………….
Ole grand dad Warren plows into Japanese trading companies and Softbank plows into US tech………………
Who is going to be the winner in a couple of years?
I noticed Warren got out of US banks and since most large Japanese companies are essentially banks, he is now holding Japanese banks instead.
He is buying trading companies.
They own lots of parts of other companies in Japan and around the world.
In particular they own lots of joint ventures in other countries involved in natural resources.
In Australia they are big partners in some of the biggest natural gas projects and coal mines in the country.
The guy has the problem of having too much money to invest which restricts the areas that he plow his cash into.
There are lots and lots of really good Japanese companies to invest in that have lots of cash, good earnings (meaning real earnings unlike something like Tesla), and outstanding products that sell for cheap(er) valuations on the share market than many other countries around the world.
Their accounting systems and regulations are pretty good too as well as trading on the markets.
(All share markets are corrupt to some extent in the rules that allow players to have different rules. I thought that Japan was bad until I moved to Australia. IMO Australia has one the most corrupt, black trading markets around.)
It’s kind of interesting that Buffet has done the opposite of the current trend. Instead of leveraging up he is basically running an unleveraged company right now.
Warren is nervous holding this much cash. Cash should be better than hypervalued equities. He also bought Barrick.
He is being patient. Trimming off the toxic waste, grabbing a couple of small value deals that serve as minor currency hedges, and waiting because time is on your side of you have plenty of cash and see pain on the horizon.
The action Wed seemed to target large pockets of OI, SPY calls at 355 and 358. VIX is well above what it should be in a market which is making new highs. The strategy is to sell inflated premiums, Calls, when they are skewed relative to Puts. Sell a strike two sigs away and your shares are being called away. In 87 they were selling Puts and the same thing happened on the downside. The meltup is still in play. The dollar is putting in a bottom, and that should catapult equities higher. ROW capital inflows, out of PMs, and bond funds. Yields back up, no new IPOs. Leadership narrows.
It’s all a bit much for my little brain, but Wolfe and others, I’d love to hear a reply to this comment?
How do commodities fit into this rotation?
It all reminds me of the Sting where they create a fake tote and everybody in the tote is in on the scam. Except the Mark, of course.
Wolf,
Thanks. So the sentiment is down with the virus and the election. So like the calls here come the puts? Like making bets up or down, with enough of them for the dealers there is a lot of volitility. I will just hold and re- invest. Seems like they could do the same thing with the puts, if they get enough of them. I’ll watch for that next. Can’t believe the money made on tesla in six months, unreal.
We have 5-10% corrections every year. Sometimes more than once a year. And every time people think this is the end of the stock market. And then next year when prices are 20% higher, it happens again. Apple, Amazon, Tesla have been pronounced dead more times than anyone can count.
But this year is special, because we had a 30% correction in February/March! But so far the current dip looks an awful lot like the garden-variety 8% correction in June. Which, looking at the chart, also unwound off some overheated trades.
Some times I like to use statistics as my mental model for investing. Last time I looked standard deviation of annual returns of stock market was about plus minus 17%. If you are going to invest for fifty years you probably going to see a 3 sigma event which is plus minus 51%. There tends to be outliers so in reality you can’t bet the bank on this number.
To me the problem is the future returns are going to be so low, that it’s just not worth the risk of market exposure any more.
Except that the future returns for Everything are low. And you have to protect against both inflation risk and deflation risk. And the Fed is waving the “inflation” flag. And rule #1 is “don’t fight the Fed”.
Re: Apple. I have read that in June July among the Fed’s bond purchases were those of Apple. This seems amazing. The co obviously doesn’t need the money and per billion of cap employs very few in the US.
So why do it?
Why, haven’t you heard? At a cool 2 trillion dollars, Apple is the mostest bestest company ever! How can you go wrong?
Because the bulk of AAPL’s earnings are stashed overseas, it issues bonds to finance dividends/buybacks in the US. The alternative would be to wait around for a repatriation holiday, but that ain’t happening in this climate.
I get why A issues them but why is the Fed buying them?
It’s not what the Fed was buying, its WHO they were buying from… someone needed cash, and AAPL was maybe the best collateral they had to offer up.
The Fed should be required to disclose not just the assets they bought but the counterparts they bought from. But that would create fear and panic and probably take down one of the naked swimmers in The Club.
Just thought of one reason: to deflect critics who say they’re buying BBB crap. They bought it as an investment! The Fed needs to make money.
Well Nick, here is a theory…
AAPL is in the SP 100, the Dow, and NASDAQ.
If the Fed was attempting to put some “lipstick” on the indexes, this is exactly the type of play they would do.
AAPL is in a stock buy back program, rolling in money, and the Fed buys their bonds?
Powell has tipped his hand with his concern and awareness over “perceptions”. If the Fed says to Wall St ” You guys might want to buy, before we do”, mission accomplished. They get the desired effect with minimal action or effort.
As a subscriber to Motley Fool (their $99.00 premium, not their numerable $1400 demands for a list of their favorite stocks), they have been pushing stocks like Tesla.
When I emailed Motley Fool to ask why it recommended such an overvalued company, the response pretty much was to tell me I did not understand investing and should pose the question on their forums for response.
I’ve listened their podcast before, but not anymore. I admit don’t that I don’t know much about investing, but I can recognize when someone is just riding a prevailing narrative.
Wall Street will create whatever narrative it can that ends with “buy, buy, buy”. Wall Street doesn’t care about the economy, the country, its citizens or the world. One day Robinhood is great because it adds to buying pressure and the next day its clents destruction is really good because it gets rid of weak hands. Blah, Blah, Blah, yadda, yadda, yadda. Oh, Jesus make it stop…..
Maybe they will start offering fractional shares with your meal delivery. “10 fractional shares free if you order now”. Or maybe we could start tipping the driver with our fractional shares. Micky Ds might start asking “Do you want any fractional shares with that?”
Wusses buy puts.
Real men write naked calls.
And the wussies are liable to stay solvent
We always seem to hear about Robinhood, but these are many trading apps out there. E-Toro and Plus500 come to mind because they have been bombing YouTube for weeks now with their ads (Poor “Lv60 Wizard” Dave is their Mark). I probably get a disproportionate share of these ads because I read stuff about economics.
These ads often come with a warning about losses exceeding deposits. Hmm, that can’t be good. Does that mean that the potential losses could be untold? Is that what you get for betting on OPP (that’s other people’s property for non Naughty by Nature fans)?
Fat Chewer,
Yes, and I think Robinhood has become what Xerox and Google are: company names that have morphed into nouns and verbs. I’m going to google something on Bing. I’m going to xerox something on my Cannon copier. That kind of thing. “Robinhood trader” has come to mean any active app-based trader, as distinguished from the regular “day trader” that may have elaborate four-screen setups at home and aren’t day-trading at all, but are trading by the minute, or enter into positions that for weeks, or whatever.
Maybe the good news is that Wolf’s short on the market will be back in the money soon! The Fed is probably gonna jawbone this one some more but thinking the risk off phase of the election cycle is starting might be the narrative change now.
Activities such as these trading schemes all spring from money being too cheap, interest rates way way too low. Is this the “stimulation” that the Fed is looking for? For this is what they are aiding and abetting…in spades.
You have to laugh Wolf. We protect Stephan Schwarzman and Larry Fink but it’s okay to sacrafice 20,000 Joe sixpacks?
Yes, that has always been the case. But the number is in the many millions — not 20,000. When the dotcom crash happened, small investors got wiped out as the Nasdaq lost something like 75%. The Fed only stepped in when it started tanking the broader economy, and then it created a housing bubble.
“Stocks reacting to and reflecting reality would be the worst-case scenario. But that’s not happening, the meme goes; it’s just a technical issue that will go away.”
Market’s crash because of credit issues, and all forms of credit, junk and up, still look solid. (it may not be real but it’s solid).
Liquidity can’t fall because the Fed will step in to provide an infinite amount of it.
So, if you use reason as a metric, this is just a minor pull-back. But last I looked there was over a trillion in the treasury TGA account. Likely it will all be monetized before the election and stocks will sky-rocket. Or do you think Powell and Munchin are boyscouts?
So what happens on Tuesday?