The 3rd quadruple witching for the year occurred yesterday, at a time when uncertainties weigh on stocks. Since the confluence of expiry dates for derivatives usually generates high liquidity, market participants need to be careful about any market spike. Although that did not happen, we had a lot of volatility, with major US indices opening in the red, only to stage a technical rebound in the first several hours of trading. Still, conditions in the stock markets are mixed, which is why we want to analyze three of the most critical aspects.
# Tech stocks still under pressure
Things had not changed from a week ago and tech stocks banked their third consecutive losing week. The Nasdaq100 closed below 11,000 and the big names (Apple. Amazon, Microsoft, and Facebook) were down once again on Friday when expiries for all types of derivatives were due.
As the statistics showed during the past few months, there had been a lot of interest in these big names and as usual, an overcrowded trade leads to impulsive moves on both sides of the market. Traders continue to reduce their broad exposure, but where do they place new trades?
# Rotation going on?
Even though they had dropped, as well, the S&P500 and the Dow Jones Industrial Average are in a much better position than Nasdaq. Since they include other types of stocks (industrials, or financials), the price action picture is not indicative of impulsive continuation lower. Since the Nasdaq dropped more than the other 2 indices, it means traders had been rotating into underperforming names. It is these stocks that can be a catch-up play at a time when fundamentals for tech are near the peak of the dot.com bubble.
# Positioning for the election uncertainty
In the short-term, the absence of a new stimulus bill is weighing on the economic activity, but as September is almost done, we get much closer to the Presidential election. The combination of high COVID-19 active cases (which could make people reluctant from voting), the mixed speech of the actual president (which insinuated that he might not accept the result if he losses), and the potential implications of the next four years will make market participants more cautious heading into the event.
Volatility contracts are pricing in much higher uncertainty and we could see some more weakness in the month ahead. The stakes are much higher as compared to 2016 and we should see that in how market valuations perform.