The S&P 500 is hovering right around 4,120, where it closed after the Federal Open Market Committee (FOMC) meeting last Wednesday (returning all of Thursday's rally). The Nasdaq 100 is still above but has struggled since then.
Before anything, let's remember that some big tech companies, among them Microsoft (MSFT) , Apple (AAPL) and Alphabet (GOOGL) , all pointed to some weakness last week. That information, which I think is crucial, has been lost in the shuffle but is something we should be thinking about.
Expect Tough Talk from the Fed
Fed Chairman Jerome Powell speaks here on Tuesday. Minneapolis Fed head Neel Kashkari already spoke and cited last Friday's jobs data as a need to hike (we discussed that likelihood on Friday). Atlanta Fed President Raphael Bostic said something similar Monday.
I suspect the Fed didn't come across as committed to rate hikes as it intended last week, and it now needs to correct that perception. A weak jobs report, and maybe they let it slide, but there is a real focus at the Fed to get hike expectations back up. Let's face it -- no one is talking about any sort of hard landing; everyone has jumped to soft landing or full rebound mode. I think that is premature, but we cannot fight the moment.
The markets might be able to withstand the onslaught of Fed speakers, but it will take some effort as positioning has shifted to being bullish again.
China
Relations continue to sour between the US and China. I think it was disappointing that Secretary of State Antony Blinken didn't go to China after the balloon incident. If we are going to rectify the situation, it must be in person, at least to begin with, and I see no signs of that happening. The retired generals and admirals I work with all seem to agree that one thing that is bipartisan in D.C. is the concern about China. That doesn't bode well for relationships going forward.
On the China re-opening front, much of the trade data confirm what I've suspected, which is that China was largely open already, at least for what U.S. companies need, and the full re-opening was more domestic/travel-oriented than oriented to global supply chains - i.e., a bit too much hype.
0DTE, or 0 Days to Expiration Options
The importance of these options in the day-to-day market has been increasing and reached a crescendo last Wednesday and Thursday, where even a casual observer had to notice their influence.
We can debate the subject, but I am convinced that 0-day options amplify moves as they allow bettors (and it really is betting rather than investing) to try to push markets by shifting profits into ever higher (or lower) strikes and hoping for another gamma squeeze (where people who have sold options are forced to cover their risk by buying back the options or underlying stock).
I think there is no debate, or little debate, that 0DTE works in both directions, so just like big upside days such as last Thursday can come out of nowhere, you can get exaggerated moves to the downside (yes, there were reasons to rally, but you cannot convince me that 0DTE didn't play a big part in the outsize gains).
One purely factual statement is the popularity of 0DTE is impacting volatility and the VIX. As more and more options with shorter maturities are traded, the number of options traded that fall into the maturity bucket used by VIX decreases. That means the amount of data going into the VIX calculation are reduced. I do not see any way that fails to make the VIX a less robust indicator. So, VIX, which isn't in my top indicators most of the time anyways, is being relegated to deeper on the bench because 0DTE is where it's at for volumes (and hence, information).
Two things to note out of all of this:
- Position smaller to take advantages of opportunities and because mistakes are more painful than you would expect.
- The sentiment/positioning of "overbought" and "oversold" can turn more rapidly than ever -- literally day to day.
