U.S. stocks halt winning streak with big options test

Rita Nazareth, Bloomberg News

BNN Bloomberg's mid-morning market update: June 16, 2023

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A seemingly unstoppable advance fueled by Wall Street’s obsession over anything related to artificial intelligence took a breather on Friday, with the market facing the test of a massive options expiration.

The tech-heavy Nasdaq 100 underperformed major benchmarks, led by losses in giants Microsoft Corp. and Apple Inc. — which had recently closed at all-time highs. A worrisome warning from Micron Technology Inc. weighed on chipmakers, while Adobe Inc. climbed on a bullish forecast. The S&P 500 halted a six-day winning streak, but still notched its best week since March.

Stock traders caught between the fear of missing out on this year’s rally and mounting concerns about an overbought market had something else to cope with this week: positioning.

With an estimated US$4.2 trillion in options contracts tied to stocks and indexes scheduled to mature, traders would typically need to either roll over existing positions or start new ones. The impact of derivatives on trading this week was so significant that, at one point, the market’s favorite volatility gauge was climbing alongside the S&P 500.

The so-called VIX finally gave in, and with Friday’s plunge, it ended up erasing this week’s advance.

“The market could see some wild swings in either direction for no fundamental (or even technical) reason at all,” wrote Matt Maley, chief market strategist Miller Tabak + Co. “So nobody should read anything into today’s movement.”

INFLATION, PUTIN, FED

Indeed, the market seemed to have ignored certain developments that would otherwise be considered catalysts for trading.

That was the case with data showing a slump in consumer year-ahead inflation expectations and the latest geopolitical news. President Vladimir Putin said Russia has delivered its first tactical nuclear weapons to Belarus, three months after announcing the plan that threatens to ratchet up tensions with the U.S. and its allies over the war in Ukraine.

Not even hawkish Fedspeak had much of an impact or any impact at all in Friday’s trading.

“The market caught a renewed bid from traders suffering from FOMO and ‘chasing’ the market higher,” said Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter. “We are not bearish stocks right now, but we are growing cautious on the very near-term direction of the market given how quickly the market priced in a very Goldilocks macroeconomic environment based on only limited evidence of improvement in the current major market influences.”

The S&P 500 may have entered a technical bull market last week, but Bank of America Corp.’s Michael Hartnett said Friday he’s not convinced this is the start of a “brand, new shiny bull market.”

The current market looks more like 2000 or 2008, with a “big rally before big collapse,” Hartnett wrote.

Equities had about US$22 billion inflows in the week through June 14, while bonds had US$6.7 billion of additions, BofA said in a note, citing EPFR Global data.

In other corporate news, iRobot Corp. soared after Amazon.com Inc.’s proposed US$1.7 billion deal to buy the robot vacuum firm was given the all-clear by the UK’s antitrust agency. Virgin Galactic Holdings Inc., Richard Branson’s space-tourism venture, surged after announcing that its long-awaited first commercial passenger mission will take off as soon as June 27.

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