Jobs News and a GameStop Gamma Squeeze Highlight an Intriguing Friday
The market has been anxious for a more dovish Fed, but it will come at the cost of a less robust economy.
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There are two interesting events occurring Friday that will impact the market. The first is the May jobs report, which will be released at 8.30 am ET. Economists expect about 180,000 jobs, a slight increase from 175,000 in April. The unemployment rate is expected to hold steady at 3.9%.
In recent weeks, the market has grown more concerned that the economy is slowing, and that may be reflected in the payroll numbers. GDP is declining, sentiment has been weak, and ISM manufacturing disappointed. Bonds have rallied sharply in the last eight sessions mainly due to growing concerns about economic slowing.
However, the upside of an economic slowdown is that it may hasten Fed interest-rate cuts. A soft jobs report on Friday morning could greatly increase the potential for a rate cut starting in September and lead to another one or two later this year.
The market has been anxious for a more dovish Fed, but it will come at the cost of a less robust economy. Will interest-rate cuts offset the damage done by a slower economy? The market wants to believe that this is the case, but there are warning signs in the recent price action, and it may be difficult to stop a slowdown as it gains traction.
The other big event on Friday is with GameStop GME. Meme trading is attracting a huge amount of attention again due to the drama of Roaring Kitty. He has the potential to turn a $50,000 stake in a stock with questionable valuation into $1 billion.
GME is trading up sharply in anticipation of his YouTube livestream at noon ET. The big question will be how he handles a large option position. The main reason that the stock is moving is a combination of an old-fashioned short squeeze in the common stock combined with a gamma squeeze as a result of the option position.
A gamma squeeze occurs because when a market maker sells a call to someone like Roaring Kitty, they will hedge the position by buying stock. The market maker simply wants to capture the option premium and doesn’t care about the price of the stock. The more short-dated calls that are bought, the more shares that market makers have to buy to hedge their positions. That creates huge pressure on the stock and squeezes out anyone who is trying to short it.
That is the dynamic that is causing the huge move in GME. It is going to cause tremendous volatility Friday, but so far, it is very isolated and hasn’t been impacting many other stocks like it did three years ago.
Some market pundits view this wild speculation as a sign of a frothy market that is close to a substantial top, but there is no way to use an event like this to accurately time a market turn.
We’ll see how these two events impact the overall market, but overall price action has been struggling, and the potential for a shift in trend continues to grow.
At the time of publication, Rev Shark had no positions in any securities mentioned.
