What's Going on in the Markets? A Must Read ZH Explanation

Mish

As the market rallies, so has the VIX.

Hedge Fund Manager Fill Zucchi Says Must Read

An Epic Battle Is Raging Beneath The Market Surface

Mohamed El-Erian Chimes In

Epic Battle Between Hedge Funds and Market Makers

ZeroHedge discusses the Epic Battle Between Hedge Funds and Dealers.

Short Explanation

  • Speculators are buying out of the money calls on tech stocks at a massive rate.
  • As the stock rallies, the call sellers (generally the market makers) have to buy more and more of the underlying issue as a hedge leading to even higher call prices, even more call squeezing, even more delta-hedging and buying the underlying, which eventually spills over into more and more of the market, and so on until there is one massive marketwide meltup.
  • This resulted in the highest VIX print at a market all time high since, drumroll, the day the market peaked in March 2000, when the dot com bubble burst. 

  • Cross-asset guru McElligott, picked up on this saying that Gamma hedging has become "the most important flow in the market, with the convexity of said short-dated “lottery ticket” options creating an 'all-or-nothing' binary-options market behavior into weekly expiries, seen in these increasingly exponential ramps in names like TSLA."

  • With a large number of call contracts outstanding and “relative illiquidity” in some of these single-name shares, they have been forced to turn to proxies such as the S&P 500 and Nasdaq 100, according to Hennessy. In order to hedge, dealers have been buying implied volatility on these benchmarks too.

  • Over the past few weeks, there has been a massive buyer in the market of Technology upside calls and call spreads across a basket of names including ADBE, AMZN, FB, CRM, MSFT, GOOGL, and NFLX. Over $1 billion of premium was spent and upwards of $20 billion in notional through strike – this is arguably some of the largest single stock-flow we’ve seen in years.

  • As the street got trapped being short vol, other names in the basket saw 3-4 standard deviation moves higher as well – on Wednesday FB rallied 8% (a 3 standard deviation move), NFLX rallied 11% (a 4 standard deviation move), and ADBE rallied 9% (a 3 standard deviation move).

ZeroHedge concludes:

"A few large hedge funds understood this and have added fuel to the fire by pushing implied higher and higher and putting further pressure on the likes of Citadel and Goldman. With this process helping drive names like Apple and Tesla, this also makes sense why Breadth has been so terrible."

"Over the next couple of days, implied vol during the day should be a phenomenal leading indicator."

When this unwinds it rates to be spectacular, perhaps even as much in the opposite direction.

I am not going to trade this. But if I did I would buy out of the money puts in small amounts until it worked.

Mish

Comments (27)
No. 1-13
dbannist
dbannist

Mish, I sort of understand what's going on but I'm not willing to go long here and join the fray.

I'm very curious what your opinion is on a 3 month timeline. How do you trade with this knowledge? Go short and get killed by the FED put? Go long with the philosophy that if you can't beat em, join em? Potentially get killed when this all reverses?

What's the best play? Go long miners? I'm long on GOLD but probably going to switch to NEM, but only 10 percent.

How are you going to trade this?

teejaytrader
teejaytrader

I've been watching this play out in TSLA on the daily. Huge volume in the furthest OOTM weekly calls and other round number weeklies. The conspiracy theorist in me wonders if perhaps someone is trying to crash our markets before the election. Like maybe China?

Ted R
Ted R

A leading indicator of a..........stock market collapse.

Augustthegreat
Augustthegreat

This positive feedback loop works in both directions: when a stock is rising, the loop squeezes it up at ever faster speed; but once the uptrend is broken, the downtrend will go down dramatically.

AWC
AWC

Starting to appear that there will be a reckoning taking place between now and Election Day. What’s it going to be Jerome? Will you dump Donald, or launch him to victory? The ball is in your court. Either goose this thing right now, or let the chips fall.

Casual_Observer
Casual_Observer

The market knows the Fed has no good options. They have to keep it propped up. I think part of the reason the Fed is buying corporate bonds is that was the area of highest risk for counterparty investment banks and hedge funds. I talked to my brother in law who has his own hedge fund and he says everything is uncharted waters now for everyone which is why the Fed has thrown so much liquidity and buying at the problem.

Misc
Misc

Commentators tend to talk about changes as percentages. It would be more meaningful, but scarier if they used just dollar amounts. Apple is valued at about $2.25 trillion. Over the last week, it has been known to make over a 5% move on a given day. If it happened on the downside, that would be equivalent of IBM going bankrupt.

Ensign_Nemo
Ensign_Nemo

My search engine result for tesla+market+capitalization is

443.48B for Sept. 2, 2020

https://ycharts.com/companies/TSLA/market_ca.

My search engine result for tesla+cars+sold+last+quarter is

90,650

My calculator shows that if the quarterly sales rate is multiplied by four to make an approximate annual rate, then the market cap per car sold in 2020 should be about $1,223,055.

If I round it a bit to account for the fuzziness of the projected sales figures, then it's about $1.2 million per SALE.

Is anyone on Wall Street actually doing any, you know, thinking these days?

JonSellers
JonSellers

Put a few hundred grand into VOO a few months ago. I've been extremely happy with the results. If everything collapses I'm okay. I'll just buy more for the next ramp.

Tony Bennett
Tony Bennett

A couple of economists with NBER (official caller for US recessions) authored a paper back in the 1980s which pretty sums up what we're seeing NOW.

The gist of the paper at the end of a bubble returns get Crazy ... all to keep market participants locked into their rollercoaster ... before the big flush. A gentle topping would give them time to assess ... and leave.

A lucky few will get out (near the) top. Most? They'll learn the 5 stages of grief ... the hard way.

Cocoa
Cocoa

When this goes, it's over folks. Japan-ifcation is best case scenario. Assets are overinflated and held in a supply squeeze(like DeBeers Diamonds.) FED and CBs take shares out of circulation and artificially hold prices high...as they are near worthless in some cases(like Hertz rent-a-car, TESLA etc.) CB's are insider trading because they OWN this crap now

Six000mileyear
Six000mileyear

What a mess the FED has on its hands. First it tries to stimulate the economy by holding rates low (which did not work). Then it purchases Treasuries and mortgages from banks (that didn't work either). And because of all the help it attempted, markets are now even more leveraged and less stable than before. The money never goes where the FED wants it to.

davebarnes2
davebarnes2

I will need to sell stocks in 5 years.
How does this affect me?


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