Bloodbath in US technology stocks – what comes next? Bloodbath in US technology stocks – what comes next? Bloodbath in US technology stocks – what comes next?

Bloodbath in US technology stocks – what comes next?

Equities 6 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  Nasdaq 100 was down 5% yesterday driven by dynamics in the options market where market makers likely created a negative feedback loop through their delta hedging activities. Based on estimates of these dynamics we believe the technical drivers for the sell-off have exhausted themselves and that the market will stabilise here potentially bouncing back into the weekend. Longer term we still remain positive on equities as the rebound narrative is intact supported yesterday by better than expected initial jobless and continuing claims.


Before the US equity market opened we put out an equity research note Skewed options market causes huge moves in US tech stocks warning of a potential violent trading session in US technology stocks and unfortunately it happened. The three trading sessions leading up to yesterday’s bloodbath showed unusual behaviour in Apple and Tesla shares and especially the day before on Wednesday the shares tumbled sharply while the broader market was up. This is very unusual for mega-caps. These dynamics made us surer that something was lurking under the surface of the Nasdaq 100 rally. While the sell-off was painful we remain positive on equities both short-term and longer term.

Source: Bloomberg

As explained in yesterday’s note the most likely cause was feedback loops arising from options. Commission-free trading in US equity options and strong bullish sentiment have caused options positioning to become very skewed on the call side (far more outstanding calls than puts). All these long call options sit on the books of market makers which are then short these calls. They would lose money if the underlying stock continued to go up. Therefore, these market markets hedge their short call positions (delta hedging) by buying the underlying stock (in these cases Apple and Tesla). If the notional outstanding amount becomes big enough the delta hedging activity by market makers become a too share of the normal trading flow in the underlying stocks and thus suddenly they activity causes price impact hence the increased intraday volatility in the chart above.

In our Saxo Market Call podcast this morning we have slides explaining some of these dynamics and more. The technical concept in options called gamma explains the rate of change in the delta of the options. What likely happened yesterday was that the gamma exposure so large that when prices fell the delta of all the call options held by retail investors fell fast and market makers reduced their positions of underlying creating a negative feedback loop. Based on estimates of this gamma exposure and the curvature of this net position means that we believe the technical reasons for the sell-off are no longer present.

We are still positive on equities

Short-term and going into the weekend it will be interesting to see whether US retail investors can muster the strength to set in motion a rebound. Regardless of the potential rebound today and the technical sell-off yesterday, we remain positive and constructive on equities. Yesterday’s initial jobless and continuing claims showed significant improvements which caused the New York Federal Reserve to update its Weekly Economic Index tracking US GDP growth in real-time. For the week ending 29 August the index now estimates US GDP growth at -4.4% y/y a significant improvement from the -11.5% y/y in late April. If the rate of change in this index is positive (i.e. the negative GDP growth gets less negative week by week) the rebound narrative is well alive, and equities will continue to outperform bonds. While the macroeconomic uncertainty is still high the support from the fiscal side is still enormous with France announcing additional €100bn in stimulus and South Korea over the weekend announcing the country’s largest stimulus programme in many decades. All this fiscal stimulus will flow through to the broader economy.

Source: Bloomberg

The chart below is a 5-year chart on the stocks mentioned in the research note. This is for regulatory purposes.

Source: Bloomberg

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.