A “Vicious, Brutal Day”: Four Traders Respond To Today’s Market Chaos
It wasn’t supposed to be like this.
One day after Powell basically told markets that the Fed will not get in the way of the biggest asset bubble every blown for the next two years, stocks initially opened higher near all time highs only to drift all day as hapless traders watched as the SPX shed 1.5% – its worst drop in three weeks and the Nasdaq 100 fell 3.1%, erasing its gain for the year.
This, as SpotGamma writes, was a very atypical high gamma day, and as we have repeatedly cautioned, the negative gamma QQQ trade and weakness in tech is really dragging the S&P.
Making matters worse, tomorrow’s quad-witch will only lead to an even more volatile market: on one hand, the S&P was on the zero gamma threshold which still implies a 3900-3950 pin is in play, but the larger issue is that due to the QQQs closing in negative gamma territory again, the Nasdaq is “poised for a lot of volatility tomorrow due to that large negative gamma position. Because tech is such a large piece of the S&P there is a lot of overlap here and we need to mentally “blend” these crosscurrents” according to SpotGamma.
Finally, as shown in spotgamma’s QQQ vanna chart below, the “slope” of hedging is quite high, which suggests that dealers have a lot to sell if markets drop, and a lot to buy back if markets rip.
Today’s bloodbath wasn’t contained to stocks however, and the violent drop came as bond yields rose – leading to even more risk parity pain – while oil prices plunged on concern about the impact of European lockdowns on demand. In short, as Bloomberg summarizes, it was a “brutal day”:
So as traders prepare for what may be another painful quad-witching, one where the amount of expirations will be lower than usual…
but where liquidity will be dismal…
… here is what four of them are saying, courtesy of Bloomberg:
Larry Weiss, head of equity trading at Instinet LLC in New York:
It’s a bit of everything, rotation continues out of the crowded tech sector and small caps giving up some recent gains. Ahead of major index rebalance activity tomorrow, volumes are a bit light, exacerbating the moves. Oil is a factor, and inflation fears — despite the Fed Chair’s calls for rate stability through 2023 — remain a concern.
Adam Phillips, director of portfolio strategy at EP Wealth Advisors:
This appears to be a delayed response to yesterday’s FOMC meeting. Jay Powell has made it clear that investors are on their own for now when it comes to higher yields, so even if bonds appear oversold, yields may still have further to go. That being said, the pressure on the Fed will only grow as economic data strengthens in the months ahead.
Chris Grisanti, chief equity strategist at MAI Capital Management:
The market is voting right now that we are out of tech and into cyclical, energy and financials.The viciousness and the rapidity of it surprises me but the direction of it doesn’t. It really did seem to grow on itself today. Bonds yields just kind of leaped. Inflation is spooking the market. Companies that would do well with higher rates are clearly out-performing. Powell is saying, take me at face value, we’re going to keep rates low — that’s terrific for economic growth but it scares the bond vigilantes that there will be too much and it will turn into inflation.
Mike Bailey, director of research at FBB Capital Partners:
It’s as simple as yields up, growth bad. We’re seeing a pattern where an uncomfortable spike in the 10-year Treasury reminds equity investors that their tech stocks are trading well above average, with cyclicals looking more attractive. This spurt in Treasury yields will settle down and equity investors will come back to tech and growth, but it may take a few trading days.
Finally, for those who missed it, here is our preview of Quad-Witch: Here Are The Stocks With The Biggest Call And Put Gamma Imbalance
Thu, 03/18/2021 – 18:40