Market Update for the Week Ahead
Welcome back to The Juice where we break down market movements and momentum. Before we get started we want to say congrats to those who won the VIG Fantasy Stocks Kickoff Classic. It was a hard-earned win with some of the runner-ups squeezing by to victory and hitting that cash prize!
All eyes were on the Federal Reserve with the FOMC and interest rate decision last Wednesday. The decision was made to maintain rates at near zero and begin reducing the pace of asset purchasing. The Fed will begin by tapering 15 billion in asset purchases this month out of the current 120 billion that the Fed is buying.
Summary: The party goes on… for now.
Today we want to look at some of the option flow that ran through the indices to see what predictive measures may be on the horizon.
What's going on with QQQ?
The QQQ ETF, which holds some of the largest tech companies on the Nasdaq has been on a rampage since the start of October. Relative to the SPY, the QQQ has returned 13% while the SPY has returned 9%. These are very good 30-day returns from both ETFs and it displays the dominance that big-tech has had in the markets as of late. Let’s dig into the QQQ Terminal on this one:
Coming off the tech dip we saw in September the chart gave us green candle after green candle for the month of October. Oddly enough, Friday closed at the strike with the most Gamma Exposure (top right corner of the image) and highest buying pressure from options dealers.
The saying usually goes “stocks that are going up, tend to keep going up”, however, the QQQ has broken off quite far to the upside from the orange line and 50 EMA. I would be aware of a possible pullback and refueling before making the next move.
Why has the QQQ gone parabolic?
The QQQ’s main holdings are all big-tech. In this case, it’s been led by the positive earnings results from Microsoft, Alphabet, and the recent melt-ups in Nvidia and Tesla. Weird to think that Apple and Amazon have been the laggards in the group. Here’s a quick look at the QQQ holdings.
What's the VXX doing?
The VXX, which measures short-term volatility futures has been on a slow, but steady decline pretty much since the spike in 2020 and at the start of the pandemic. Going back to what we opened the letter with and the FOMC/interest rate decision, which will most likely play a role in volatility that arises in the future. The market has been very reactive to news of taper and interest rates, so let’s enjoy this decline in volatility going into the holiday months.
Lastly, some bearish flow was seen through the SPY and SPX. The S&P 500 has continued it’s huge rally, mainly led by big-tech as for the most part small and mid cap stocks have been getting hammered. With some FAANG reporting lack-luster earnings I’d keep an eye on a pull back and possible (temporary) rotation into new sectors.
What is the Russell 2000 Small Cap Index doing?
For those that have been following the IWM - Russell 2000 ETF, it has finally broken out of it’s tight 8-month range. The Russell tracks 2,000 small cap stocks and is weighted fairly evenly throughout, but some of the names that drove the strong performance over this last week were AMC, CAR, and CROX. Let’s take a look at some of the top action in Russell Stocks from Friday from the “Russell Fire Calls” discovery scan.
ViewRay (VRAY) is an interesting name making it to the top of the list. Shares of VRAY are currently sitting at 52-week high so seeing 12,000 contracts being traded for March 2022 expiration is noteworthy to keep an eye on.
Other popular names making this list were Penn National Gaming (PENN) and Shake Shack (SHAK), which has +7.5% and +16.5% trading days on Friday, respectively.
The TSLA Gamma Squeeze
What tends to fly under-the-radar quite frequently is the fact that Tesla, now an over 1 trillion market cap stock, is consistently getting gamma squeezed to new highs. This is mainly due to the popularity in the name and the amount of options traded on both the call and put side. Here’s the “options race” and total options premium that flowed through equities this week. It’s not just this week TSLA is at the top of the list, but it consistently dominates the number one spot and rarely, if ever, falls outside of the top 5.
Gamma squeezes aren’t easily predictable, but if you pay enough attention you can see the setups before they happen. There’s also no telling where the gamma squeeze will end and when you’ll see a reversal in share price. Let me display the Tesla chart with GEX profile attached on the right of the chart.
Similar to the QQQ last week, Tesla’s stock price closed where it met the highest amount of Gamma Exposure (GEX), and thus buying pressure. For those unfamiliar with GEX it is a fairly complex construct that can be broken down into a 50-page report. The short version is that as dealers or market-makers sell options, call options in the case of Tesla, they would also purchase shares of the underlying to remain neutral on the position. As the out-the-money (OTM) call options they’ve sold become less OTM or even in-the-money (ITM), they will purchase more shares to match the “delta” of their exposed positions. This whole process creates buying pressure and reverses once those open call-option positions get closed out.
After several months of chop over the summer and into the dreaded September month, the last two weeks have seen big buying pressure going into big-tech. Specifically, Microsoft, Alphabet, Nvdia, and Tesla have led the pack to a glorious rise. The strong performance from those names bled into the Russell and small caps that have also, somewhat broken out to the upside. One key thing to watch is the breadth of these rallies. Although we’ve been going up, breadth remains mediocre at best, which is usually a sign that we are still in uncertain times.
That's all for this week folks! Don't forget to signup for the weekly VIG Fantasy Stocks Kickoff Month - Week 2 games starts at 930 AM EST on Monday, November 8, 2021. Have a great week!