The near-parabolic rise in the technology sector since the end of July had been questionable and relentless. The fundamentals were always there, but the extent was debatable. This took the S&P 500 index to highs of 3570 as well, as 20% of its weighting comes from the large-cap technology names that had been in focus.
There is an old adage on Wall Street that the volatility market does not lie. Most do not observe or look at derivative markets, but they hold the truth, or at least uncover anomalies when they presents themselves. The Nasdaq was up 15% in August alone, as it broke out from July levels and never looked back. This was happening when all the other stocks and sectors in the index were not moving or just dwindling lower. What happened to cause this terrible excitement?
Softbank (SFTBY) is what happened. This institution had been slowly losing its credibility over the years, after its fiasco with WeWork and Uber (UBER) and the dubious performance of Vision Fund investments.
In a bull market, it is easy to buy anything and hope the chap next to you buys it from you at an even higher price. It seems the only way Softbank could salvage WeWork after its IPO debacle was to invest even more in it. That being said, after the first two Vision Funds, the firm decided to launch a new investment strategy into "publicly listed technology via derivative and technical" instruments. Hoping to show "phenomenal" returns and gather investor interest. What that really means is they have zero edge in how to make money, have a lot of commitments and holes to fill in the balance sheet, so why not start buying what everyone is, large-cap technology names like Amazon (AMZN) , Apple (AAPL) , Microsoft (MSFT) , Tesla (TSLA) , etc? And the only way to do that is size.
Since the Fed is bound to keep rates low and intrinsic value keeps going to infinity, how can this strategy fail, especially since the quant funds and robinhood traders can't get enough of these stocks? Hence, the firm decided to buy $4 billion worth of upside call options on these technology names by hitting every sell side bank on the Street asking them to make them a price and lifting their offer. These same banks will remember this later on, as trading is not just a one-time thing, there is longevity in the relationships that matter.
It becomes a self-fulfilling prophecy, as when the banks and dealers are short these upside calls, they are essentially short delta of the underlying instrument, which means they need to buy stock to be flat. But the beauty of negative gamma, or when you sell options, is that as the stock rises, they get even more short the stock and need to buy even more!
Voila, that is your August upward momentum summarized. Now, the little trader sitting at home does not know or see this -- they just see the "technically solid" charts, and starts chasing, even at highs because of FOMO (fear of missing out).
Volatility started rising over the last few weeks despite stocks making new highs. This is unusual, as stock prices should fall when volatility rises. Sorry Fed, some relationships you just cannot break. The derivative traders knew something was not adding up. Negative gamma works in both directions: Now, since the stocks are falling -- possibly as Softbank is selling or has sold out their call options to pocket the premium increase -- the dealers need to sell all that stock they originally bought in size.
By just paying a small premium in the options market, one can benefit by buying 10x the actual stock one has the ability to buy. This has caught the average technology trader and work-from-home day trader, as they have just been watching charts, as they were told to, and buying Apple and Tesla purely because of stock splits. This is absurdity at its maximum.
As the 21-day moving average holy grail chart levels are faltering, traders do not know why these stocks are going down, as "fundamentals have not changed". But something has changed. The dollar is rearing its ugly head and positioning is very stretched in bonds, dollar, technology stocks, gold and silver. Once the elastic band snaps, everything unwinds.
We can try calling it whatever we want and how much "alpha" one provides here, but at end of the day, it is all one big trade. To call it anything else is foolish. Moreover, to call the gains made in the last month anything other than sheer luck and timing is even more of a mockery. But then again, that is what the market has become these days -- a sheer mockery, or legalized gambling with daddy Fed handing out free bank to everyone every time they lose.
What can possibly go wrong?