What we’ve been experiencing the last two weeks is called chop, and it’s a market maker’s favorite environment.
There is a pretty clear range here. It just happens to be 400bps wide so it feels dramatic.
Why are we ranging instead of trending?
It's probably because we pumped 15% off the lows in about 2 weeks.
I wrote last Friday that there were no fat pitches now. This is exactly what I was talking about. There is no obvious trend or news, and therefore, the market makers will pillage to their heart’s content.
Selling Volatility
When you buy options, you buy a few things. A major thing you’re buying is volatility. You are betting that the volatility of the market will go up.
Market makers sell volatility by writing options for retail customers and for others, like pension funds, to buy. They do this because they can overcharge for it and make a ton of money doing it.
Most of the time.
Days like August 5th, 2024 are when volatility funds and market makers can blow up.
I’ve never gotten into selling volatility because of this tail risk.
In his excellent book The Black Swan, Nassim Taleb argued that volatility is underpriced. He claimed to have made a lot of money buying volatility, which eventually paid off during the dot-com bust.
Maybe he did. Maybe he didn’t. The record isn’t quite that black and white.
These days, buying volatility is a lot more treacherous. The market makers are sharper than ever and retail is buying more options than ever.
Basically, you don’t want to be buying options willy-nilly.
This week is the perfect example of why.
NVDA had an implied move of more than 10% going into earnings.
Notice that it traded in about a 10% band, 5% up, and 5% down from where it started the week. That chart is a battlefield littered with dead retail traders.
Silver Linings
Against the backdrop of all this price insanity, a few good things have quietly happened.
A slew of good market data came in today. Initial Jobless claims beat the previous consensus, and GDP growth estimates came in very high.
Compare the last few week’s jobless claims against similar weeks below. There are only a handful of better weeks on record.
Salesforce reported strong earnings after a previous lousy quarter.
Despite the market reaction, NVDA also reported strong earnings.
The upside of the NVDA sell-off after reasonably strong earnings is that expectations are falling back to earth. That’s a good thing, provided it doesn’t take the market down with it.
That’s healthy and needed so that we don’t approach bubble territory.
Tomorrow, we have PCE, which should come in cold, given all the other inflation data we’ve had recently. I don’t expect it to matter much, but it could pave the way for that 50 bps hike if it's cold enough.
Where To Next, Captain?
If I knew, I’d tell you. To all appearances, we are in a strong economy that has slowed off of a fever pitch, but remains strong.
Slowing in the economy tends to beget more slowing. That’s the concern.
We may well chop around for a while. At least until the new unemployment numbers come out September 3rd. Or maybe the market will chill out a bit with NVDA in the rearview and no dramatic events on the horizon for a whole week.
Maybe they’ll catch a quiet bid. That would be my bet.
As always, stay frosty, and get lucky.
And! Most importantly! Subscribe to Mind The Tape.
Disclaimer: The information provided here is for general informational purposes only. It is not intended as financial advice. I am not a financial advisor, nor am I qualified to provide financial guidance. Please consult with a professional financial advisor before making any investment decisions. This content is shared from my personal perspective and experience only, and should not be considered professional financial investment advice. Make your own informed decisions and do not rely solely on the information presented here.
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