This Day of Triple-Witching Might Just Go Out With a Bang
Here's why we could see some explosiveness today; also, let's consider that into-Nvidia-and-out-of-Apple action, ETF shakeup, and big-picture economic rumblings.
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Explosiveness. That's what I am expecting on this triple-witching Friday, as stock options, index futures and index options contracts all expire. I'm also hoping for a bout of increased volatility. In fact, the volume has been on the rise all week, and on Thursday, markets started to show some of this volatility. Technically, one might see another potential "Day One" in the Thursday trade, as both the S&P 500 and Nasdaq Composite reversed off of all-time highs in the morning to close in the red for the session.
I'm not yet sold on that idea, however, as both of those headline level equity indexes managed to hit their nadir for the day early in the afternoon on Thursday and close well off of those lows. It is difficult for me, after all of these years of experiencing mayhem on and leading into days such as this, to read too much into forced price discovery. I see these events more as opportunities for traders to do what they do best and for investors to try to improve net basis on or extract capital from their own positions. In short, I see these events from a tactical, but not truly strategic perspective.
What Gives?
Friday will almost certainly bring more such indecisive price discovery on heavy trading as roughly $5.5 trillion worth of options tied to single stocks and exchange-traded funds, equity indexes, and equity index futures all expire. This could cause some short-term dislocation. The event was for several years referred to as "quadruple witching" expirations back when single stock futures were more of a thing in this country. Since the OneChicago exchange closed in 2020, single stock futures trading in the U.S. ceased to truly be part of the financial market landscape, and traders went back to referring to these events by the original nickname... the "triple witching" of expirations.
What will happen today that makes the event even more special than usual will be that along with the simultaneous expirations that will force some action, or the rolling over of what we refer to as "long gamma," will be the S&P Dow Jones index rebalancing event that will occur after closing prices have settled this afternoon. This event will force ETFs such as the sector select SPDRs among others to reshuffle their allocations to individual stocks.
One of the largest re-weightings expected, that likely already started, was the into Nvidia NVDA -and-out-of-Apple AAPL- trade caused by the reweighting of the Technology sector SPDR XLK. Readers may notice in the disclosure below that while I remain long NVDA, I am for now, out of AAPL. I may reduce my holdings of NVDA later. I'll make that call on the fly. I may move back into AAPL later. I'll make that call later, as well. What I'm doing there, in my own small way, is jockeying for position on certain names; it is what every portfolio manager on Wall Street is doing today, some in much larger, market-moving ways.
Readers are reminded that while this day is expected to produce one of the heaviest traded regular sessions of the year, next Friday, when the Russell indexes are reconstituted, is usually the actual heaviest single trading session of the year, so we are going to dance this dance two weeks in a row, even though next week brings with it no aggregation of expiration events.
Doing the Thursday Shuffle
It felt like there was some early pent-up profit taking that was unleashed broadly around our marketplace midday on Thursday. Remember, algorithms are blunt instruments of trade, so the smoothness of human trade, where one actually used guile to get a better average price on a trade, has more or less been replaced by the equivalent of a moron racing to the point of sale with their order stapled to their forehead. Commissions are lower now. You get what you pay for.
On Thursday, the S&P 500 closed down 0.25%. while the Nasdaq Composite and Nasdaq 100 both gave up 0.79% after all three had traded at or close to new records earlier. The Dow Jones industrial average may no longer be considered a "major" index, but it does have its followers, and as it has often this week, did not move with the S&P 500. The Dow Industrials actually gained 0.77% on Thursday, carried by Salesforce CRM and Chevron CVX.
Thursday's big winner was the Dow Transportation average (+1.19%), while the big loser was the Philly Semiconductor Index (-2.69%). The small to mid-cap indexes all gave up some small turf for the session.
Breadth & Tech
Eight of the 11 S&P sector SPDR ETFs closed out Thursday's "down" day in the green, led by the Energy XLE patch, up 1.84%. Technology XLK had the toughest day among the 11, down 1.12%. Within tech, interestingly, with Salesforce popping, the Dow Jones U.S. Software index gave up just 0.05%, while as you read above, the Philly Semis were down 2.69%. Among semiconductors, Arm Holdings ARM, was pummeled for a loss of 7.67%, while Micron MU and Qualcomm QCOM gave up 6.03% and 5.12% respectively.
For all of Nvidia's headline-making ability, NVDA was down "just" 3.59%, while Advanced Micro Devices soared AMD 4.62%. Not only did AMD release a public statement downplaying the significance of the recent breach by hackers, but the very highly regarded Piper Sandler analyst Harsh Kumar, who is rated five stars at TipRanks, reiterated his "overweight" rating and $175 target on the stock. Kumar also named AMD as his top large cap chip pick for the second half of 2024.
Losers beat winners by a smidgen at the New York Stock Exchange and by a rough 4-to-3 margin at the Nasdaq. Advancing volume, somewhat surprisingly, took a 56.9% share of composite NYSE-listed trade and a 45.5% share of all Nasdaq-listed trade. Aggregate volume was up 8.5% on a day over day basis both for NYSE names and Nasdaq names. I am just not sure that this volume is as meaningful right now as it usually would be for longer-term investors.
Softer Macro
On Thursday, several macroeconomic data-points hit the tape all at levels between slightly and moderately worse than projected. The weekly initial jobless claims report proved that last week's elevated print of 243,000 was no anomaly, following up with a still elevated 238,000 print. May Housing starts printed both down sharply from April and well below expectations as did May building permits.
The Philly Fed Manufacturing index remained in headline-level contraction, but within the report, the important components such as New Orders, Unfilled Orders, Number of Employees and Average Workweek all printed in contraction and down from May. Prices Paid continued, however, to print at very high levels. Finally, the nation's Current Account for the first quarter, which hit the tape at its worst level since the cows came home. I only went as far back as 2007 when I decided I had better things to do.
In response to the housing starts, the Atlanta Fed's Q2 GDPNow model tweaked slightly lower its input for real gross domestic investment, taking that model to growth of 3.0% (quarter-over-quarter seasonally adjusted annual rate) from 3.1%. Remember, the models run by both the New York and St. Louis Feds have been more accurate than Atlanta's more famous model of late. Those two models will be revised over the weekend.
Anyone Else Wondering ... About CBO Revisions?
Why is the media not really talking about the Congressional Budget Office's revisions to its 2024 estimates for federal revenue and outlays? For those who may have missed this story (that should be headline news) earlier this week, the CBO took the estimate for 2024 federal revenue down to $4.89 trillion from $4.935 trillion, while taking the estimate for 2024 federal outlays to $6.805 trillion from $6.442 trillion. That takes their projected federal deficit for the year from negative $1.507 trillion to -$1.915 trillion. What's $400 billion between friends, right?
Just spit-balling here. Two things. One: How incredibly irresponsible of those currently in power. This kind of spending of other people's money is very close to unforgivable. Two: I can strike out with the bases loaded as any hitter in the Major Leagues. Why not fire every single economist at the CBO who had anything to do with this kind of inaccuracy in the initial estimates and replace them with community college economics majors? Would they have performed any worse in the job at hand? Unlikely.
More Fun with Economics...
Anyone else notice soaring shipping rates? Peter Boockvar of Bleakley Financial pointed out in his notes yesterday that the Shanghai to Rotterdam route for a 40-foot container has increased in price for nine-consecutive weeks and more than doubled over that time frame. About that slowing consumer price index ... Hope you enjoyed it.
Also, anyone else notice that WTI Crude is up 4.1% despite a stronger U.S. Dollar Index? Yeah, inflation is not going to wither and die. Nope.
Finally, anyone else notice that mortgage-interest costs are not part of said CPI? Jim Grant pointed that out in this week's "Interest Rate Observer." Where would inflation be if that were included? Not lower.
Fiscal Dominance Theory
What is it? A situation where a government's fiscal policy decisions regarding spending and debt levels significantly influence or constrain the central bank's ability to conduct independent monetary policy aimed at controlling inflation.
I knew what it meant, and you likely did as well, but this precise definition was provided during Hedgeye's mid-quarter Macro Themes program on Thursday. Are we already there? Sure feels like it. If the Fed cuts rates before it should, or before the election ... we'll know for sure.
Economics (All Times Eastern)
09:45 - S&P Global Manufacturing PMI (June-Flash): Expecting 51.0, last 51.3.
09:45 - S&P Global Services PMI (June Flash): Expecting 53.5, Last 54.8.
10:00 - Existing Home Sales (May): Expecting 4.09M, Last 4.14M SAAR.
10:00 - CB Leading Indicators (May): Expecting -0.3% m/m, Last -0.6% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +74B cf.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 590.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 488.
The Fed (All Times Eastern)
No public appearances scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: KMX (0.98), FDS (3.90)
At the time of publication, Guilfoyle was long NVDA and AMD.
