The OPEX Effect: July 2024 | Inside What is Driving This Weird Market

[00:00:00] Welcome to the OPEX Effect, a joint podcast from Excess Returns in Spock Gama, where we take a deep dive into the world of options and the flows to generate in the markets.

[00:00:06] Join Brent Kochuba, Jack Forehand, every month on options, expiration week as they look at the major developments in the options world and how they impact all of our portfolios.

[00:00:14] The only information on this podcast should be construed as investment advice to charities to stress in the podcast may be holding the clients of a big account.

[00:00:20] So, Brent, I feel like I always start these out the same way. It's always like the market keeps rallying. It's not stopping and doing a different year. It seems like basically again the market keeps rallying and it's not stopping. This is a very true statement, Jack.

[00:00:33] And I, the reason I'm pausing is because just this past weekend was these unfortunate events that took place at the Trump rally. And, you know, as stock market commentators, we always just sort of jump through the sort of humanitarian aspects of these things,

[00:00:52] bit war and other things. But the reason I bring this up is because Trump's eyes have surged and that seems to have also put another

[00:01:00] bit fresh bit into the stock market here as we sit here, you know, small caps are ripping and S&P is back to moving to highs and it's a train that doesn't stop.

[00:01:12] Yeah, you know, it's always weird for me to do this because, you know, there is so much stuff that goes on. Obviously, this is a very tragic event. Like these things go on. It's hard to talk about the stock market.

[00:01:22] You know, when you see those things happen, but that it is our role. I mean, there's obviously people who are much more intelligent to analyze those things than me and you

[00:01:30] And our job is to look at the implications of it and you're right. And particularly also in response to that inflation trend, like that that was a very weird. And maybe we'll get into this later. But like that day after the inflation trend was a crazy day.

[00:01:41] And the divergence between small caps and the rest of the market. And it was like, you know, historic in some ways in terms of how big that the version was.

[00:01:49] In terms of options data and flow it was historic. We are going to cover this a little bit later in the presentation. And there's all ties into the weird things happening in correlation.

[00:01:58] And I would say up until Thursday last week in that CPI print and I'm still very cautious on this market. But in the very short term we have the inflation coming down and I think people are,

[00:02:14] I don't know if there's a Trump bid to the market but it seems to be what's going on today. And so that adds an extra dynamic.

[00:02:19] You know, there's a lot of charts. I feel like I had to come into this presentation and update this morning because of everything that's just had over three weekend. But we're going to get into it here and just break down more scene.

[00:02:28] And the reason I call this correlation spasms is because, you know, Jack, we had a conversation in April where we laid out this idea of volatility suppression in record low equity correlation. I call it inter correlation where inside of the indices themselves is very bizarre movements.

[00:02:46] There's all sorts of record movements happening everywhere where it's lowest fall ever, you know, record call volume and the idea of being an all these bizarre things taking place. And I'm calling it correlation spasms and this actually ties into what you talked about how on

[00:03:01] Thursday last week there was that wacky move up for no apparent reason that we got the wild move on the CPI where we were just ripping all over the place up and down. So these spasms are starting to translate into volatility a little bit

[00:03:15] We're going to break that down along with our normal op-ex stuff here. So enough of my yamoring. Oh, give it a move forward here. Yeah, let's start with where we always start. We always start by talking about the op-ex cycle in why it's important in how it works.

[00:03:31] Right. So the general idea here is that typically it's every month, right? The third Friday, every month is the biggest op-ex operation, kind of local expiration. Yes, there's the expiration every week, but it's the third Friday is that tend to be the biggest.

[00:03:42] And what happens is after that third Friday, all the op-ex positions expire and then over the ensuing four week period options positions rebuild hedges associated those positions rebuild and the impact of the op-exes market in my view

[00:03:59] sort of hits its apex rate and op-exes expiration, which is this week and then we kind of reset falling op-exes expiration positions reset stocks shift accordingly and then the cycle continues.

[00:04:10] Now, there's also a quarterly cycle to this where we had just came off of a massive June expiration. We're going to touch on some of the impacts of that a little bit. But as we move forward into this,

[00:04:19] June expiration will find is that there's a couple of stocks that have a very call-heavy tilt to them. We're looking for a little pause in the equity market a little bit of a

[00:04:28] shift or contraction before what it seems to be just sort of another like higher coming up. On this chart here, the red X is our op-exes expiration. Not every single op-exes expiration matters,

[00:04:39] but some of them are significant turning points you can see just recently. We had major lows earlier this year in March and June the market bounced there. The last two op-exes expiration

[00:04:49] which was June, there was some consolidation there and then we liked higher. We saw this similar thing the month before that in May. So there are these major inflection points. We always point to March of 2022 or December of 2019 as the most obvious kind of historical points

[00:05:06] in this July op-exes. It's a little bit of a smaller one as you could see on this chart here. The orange is called Delta. This is how we measure this. Very, very big called Delta's relative

[00:05:18] to put Delta's. But in the realm of things, this option's expiration is about a half to maybe even a third the size of June. We always talk about this. Key zone here, 56-40 roughly to

[00:05:29] 5700 is what we're looking at for this week as where those biggest positions line up. You can see over 5700 the positions really weighing, meaning that the call positions are smaller, which is not unusual,

[00:05:39] but we like to see those positions build up it overhead strikes and that tends to be a signal to us that the S&P is ready to sort of move forward. You could think of it of this box that I've

[00:05:48] drawn on here. The CLO box is sort of the big at the money positions and how's that box slides? Up and down that helps us to sort of estimate or forecast where the stock market itself is going to move.

[00:06:00] So in general, the idea is this doesn't seem like a huge expiration. I assume we probably do have, if we look at the future, we probably do have a bigger one coming when the quarterly comes like D-D. Are you seeing that as we look at the future?

[00:06:13] Yeah, when you look at the chart here, this is expiration breakdown. Subtembers, the big one that we're facing has not double the size of July currently, but it's certainly at least 30% bigger. If they remember that the options business will build. So right now we're already bigger and we're

[00:06:33] two three months out from that September timeframe. So these positions will really start to increase as we get into the summer. That's right before the election, which is also kind of the other interesting little dynamic in there. You can see December is obviously always a monster's expiration

[00:06:47] as well. So, you know, July and August are probably relatively smaller options, expiration relative to these big September December expiration. Yeah, it's interesting. We've had a few different people in excess of terms,

[00:06:58] and a lot of people have been talking about kind of the same scenario, which is their expecting sort of a pullback in the market, maybe into the election, and then like a huge rally

[00:07:06] on the back side coming out of your seeing anything that's similar to that and what you look at, but they're expecting like a good, a big fourth quarter rally. And I don't know if that gets in

[00:07:13] the maybe what we've talked about a lot before on this podcast, which is this idea that as we get into the election, people are starting to start hedging. And then as we get past it,

[00:07:20] it probably won't be as bad as people think it's going to be and then maybe you rally at the back side of that. Yeah, I think heading into last week, I was feeling like we were going to

[00:07:30] cruise a bit for the summer. And I think still ultimately, that's going to be the case. I think you know, Trump right now is 70% odds. And so I think the market could start to adjust or we'll

[00:07:42] start to adjust to the odds that he wins. And I don't know how political commentators don't know if that's accurate or not, but the betting markets are over 70% in favor of him now. And that could always switch obviously over the coming days and weeks. But the point is

[00:07:57] that I think the market likes certainty. So maybe the stock market, I don't you know, I think from the stock markets perspective, neither of these candidates are particularly bears candidates.

[00:08:06] I mean, the markets at all time I would buy it and it was all at all time I was with Trump. And so, you know, I think if we had like an actual socialist, allow Bernie Sanders coming

[00:08:15] into the market and we didn't know how to choose between like a Biden and Bernie Sanders, Trump and Bernie Sanders then there would be a lot more angst around this. But generally speaking,

[00:08:25] I think the market hasn't been too fearful of this election. However, if we could start to pull forward an expectation of who's going to be president and what policies are that we can invest

[00:08:34] around. I understand there's a little bit of uncertainty of whether Trump is inflationary or not. He's very pro stock market. I mean, we can remember what he used to his rhetoric from

[00:08:46] the days of when he was in when he was president saying, oh, all time I say stuff. So anyway, the point is that I think there's nothing in the short term that says the trend higher

[00:08:54] should break however, you know, we get a mean reverse around the trend and this ties back into some of the correlation things that were bringing up. It's interesting to think about it because

[00:09:04] in a lot of ways, like the fact that people are hedging coming into an election requires uncertainty, right? So if it comes very clear that someone else is going to win, that some of these dynamics

[00:09:14] with hedging into election that we've seen in previous elections probably don't play out here. You know, if it becomes very clear one candidate's going to win over the other. Yeah. And and that's really it. I think the market doesn't like uncertainty. It doesn't

[00:09:26] like, you know, I remember around the Trump election somewhere saying, well we're going to hedge around the fact that he may not leave office and there were some kind of, you know, stranger scenarios

[00:09:35] that people are looking to hedge and and look if you want to hedge that extreme tail risk of stuff than that kind of makes sense. But I think a Trump victory, you know, once that starts to get

[00:09:46] priced in, I don't think anyone's thinking that Biden wouldn't lead the office. So, you know, I don't know. I just know that the market does like certainty and that means less hedging. So

[00:09:57] to the point about the market rallying after, I think there's a little path dependency maybe in there. I don't know. Sometimes I think there's this idea that monetary and fiscal policies are a little more favorable when the incumbent is running. And so, you know, maybe there's roosters,

[00:10:16] hed don't come home to roost until after an election. So I don't know that's in the bag that we extend, you know, this rally in 2025. But if inflation comes down and the Fed does get this incredible

[00:10:25] soft landing and earnings continue to be good, particularly in those semi names. I mean, Taiwan and semi put out some really good numbers last week and that pumped in video a little bit. So,

[00:10:34] you know, regardless of whose president AI and the semi chipset or can save us all from certain doom. So that's always a good, you know, backup play. Yeah, with, with interesting

[00:10:44] weather's next to this chart you have up right now is like we keep working more and more right and they're keeping less and less dots. Yeah, yeah, getting into like a little bit of uncharted

[00:10:51] territory here as we keep moving right. Excellent observation. So about a week or two ago, you could read Goldman put out largest ever positive gamut in the market. That's in the S&P 500.

[00:11:01] And why that matters is because when you hedge in your market maker and you have extreme amounts of positive gamut, that means that you have to sell a lot of stock when the market goes up and you have

[00:11:11] to buy a lot of stock when the market goes down. And obviously if you're a huge player, that can keep the market for moving too much. It puts guardrails on the market.

[00:11:18] We put those guardrails on that that suppresses volatility, right? There's not a lot of room for the market to move. And so what you could see is that as we move right on this chart into this kind

[00:11:28] of record territory, there's not too many dots on this area and this chart is chart five years old. So, you know, there's only a few points where we've been in this index, we call this our gamut index,

[00:11:39] in volatility, sorry, it just doesn't move all that much. And so that's the environment we're in. We're going to lose about a third of gamut now starting kind of Wednesday, which is a fixed

[00:11:49] expiration into Friday. And so that loss of about a third of our total gamut should drop us to the left on this chart. As you can see, volatility expands not massively, but volatility should pick up now

[00:12:02] with this option's expiration. And generally in these scenarios, we look for that volatility expressed to the downside a little bit. So, you know, two three percent pullback something like that is generally what we look for during periods like this where we have a lot of, you know,

[00:12:17] record positive gamut expiry. This next chart is a cool study we've talked about with the first time in the last edition here. This idea that, you know, we'd always talked about options, expiration to turning points, but you actually looked at the data and looked at how often they're

[00:12:29] turning point. Yes, we went back over the last five years of data and looked at whether VIX expiration occurs before optics like it does this week versus after and what you can see,

[00:12:41] there is a difference in return. So, what this simply said is if the market rallies into to options expiration, what typically is a performance after. And it actually interestingly matters with their VIX expiration occurs before after optics, equity optics. So, what you see here is about

[00:12:58] two thirds of the time, 68 percent of the time when VIX expiration is before options expiration, the likelihood of a performance flip is 68 percent. So, that simply means we've been rallying this week. We have VIX expiration Wednesday, Friday's options expiration. You got a two out of three

[00:13:14] odds that the market is lower next week than it is than it is this week. So, you know, we're opening here at 56, 7 check the market recently, but we're 56, 50, it's an ESP 500. So, okay, we pull back to what 55, 50 or 5600 that's still an incredible number and then we likely

[00:13:31] kind of bounce from that general area. As you can see, it really does shift, right? The returns before and after options expiration, it's really quite interesting in points to the impact

[00:13:42] of the event itself. So, we're going to take a look back. We always like to take a look back at what we said in the previous episode, see if any sense came out of our mouths. What are you

[00:13:52] finding when you look back and we talked about last time? Yeah, there was a couple of things and I'm short on this because these things are going to pop back up. So, the big part of our presentation

[00:14:01] was talking about this record correlation and the fact that that suggests that volatility should come down, meaning realize volatility or how much the market's been moving. Turns out at the start of last week we had the lowest realized or historical volatility in the SP500

[00:14:16] that we had since 2017. I believe it is. So, you know, you're talking about again, these record periods that are coming up, realize the volume of the SP was subs 6 on a one-month basis which is rarefied air, certainly post-COVID records. And so, you know, that tells us the market's

[00:14:33] not moving a whole lot. Now, on Wednesday this past week we actually had our first sort of little bout of volatility where the market rallied up about 1% and I'm going to cover that in a minute.

[00:14:42] So, that correlation, signaling, low volatility seem to come true. The other thing we talked about was how large the Nvidia call complex was and we were flagging that the outperformative in

[00:14:55] video should kind of start to come to an end and we were looking for a pullback in Nvidia. We got a pretty nasty pullback actually, the day of options expiration will chart that in a second

[00:15:07] in the performance of Nvidia senses pretty interesting. And then lastly, we were talking about the struggle in small caps. And the fact that there wasn't really a lot of gas for these things

[00:15:18] to move and how much it mattered if you were along the queues or the S&P, how much you were outperforming. It was excellent. Well, come Thursday this chart doesn't look so good.

[00:15:27] Piff or nice, suddenly small caps, so it's very, quite a bit and we're going to dig in that in a minute. So, you know, looking back to those were the themes. I think these themes are going

[00:15:36] to they're going to change a little bit. Does that mean some short-term volatility in markets? But I think overall, these themes changing is actually a signal of a healthier bull market. And that's what I'm looking for of the summer. But this idea of record low correlation and

[00:15:51] low volatility, I don't think this necessarily is to end with a bang in the current setup here. But again, the idea of correlation spasms is something that I really want to put forward here.

[00:16:05] Yeah, and in terms of the idea of the healthier market, I mean this is something everybody's been talking about was this idea like this has to be right now. And I'm sure we'll

[00:16:11] talk about this later. But like for the further rally to be like a little healthier, like you don't want to driven by three stocks or something consistently. Yeah, 100%. And what's so interesting

[00:16:21] about this is in like you mentioned when we're going to talk about this is I think people understand from a breadth perspective why that's not healthy. But there's actually a trading, we call it

[00:16:29] positional impact of that correlation and the lack of breadth, right? To the point on record-realized low volatility, you could see here, you know, this is where we were again, some six, we've lifted

[00:16:40] a little bit in the last couple of days. But you talked about the record period of 2017, in October of 2017 we hit record-realized low volatility of 3.5. With Trump surging the election, I've been trying to think this morning is that a number we may

[00:16:58] attack now because CPI's coming low and you know, Trump being very pro stocks. I don't know how to put for all this is I'm not a macro specialist or political analyst. The key here is that

[00:17:12] this doesn't happen in a straight line, right? So you get a little jump and fall and then when that ball pops people go great, I can sell it and then they'll generally push that to a new lower bound,

[00:17:20] right? So I think very short term, little pop and ball we're looking for, but but you have to start to look at some of these other 2017 effects as we especially head into the election, right? Consider that September October timeframe will possibly be

[00:17:35] being a high in the market or at least a low-in volatility. It's kind of an interesting idea. Is there like a coil spring aspect to this? So in almost the longer we get this lower volatility,

[00:17:45] the higher the chances can end badly. I know you were referencing 2017, which eventually did after you had to go in for a lot longer than people thought it would. 2017 was obviously so fascinating because you had this short-vol e-t-p's and that was the obvious imbalance, right? There was a

[00:18:03] big positional imbalance, right, that had to get unwound when we got a little bit of a volume in January of 2018. So there's big position built up. I think the argument now is that,

[00:18:12] well, hey Brent, you know, point to the big imbalance in the market, right? There's not this XIV product or this margin called that has to happen or maybe. And my point is that in a way,

[00:18:22] this record-low correlation is kind of the imbalance. It is the risk. And what's interesting about that January 2018 period is it was this valshok for about a week, maybe two weeks, right?

[00:18:34] And then if you look forward to month, the S&P was higher and it was like, okay great, the positional imbalance is cleared up and we all moved along with our lives. You know, options people still talk about it but people like yourself, the value guys is like,

[00:18:46] you know, something happened. I don't know, I didn't even know. So you can't, what's also interesting about valsh, there's a lower bound, right? So if you look at a 3.5 realized volatility, there's the rules, it's called the rules 16. You can divide that 3.5 by 16 and that tells you

[00:19:03] what the average daily move was roughly. So you're talking about 25, 30 bips of daily movement in the S&P. That's nothing, right? It's easy to break 25 bips in a market rally just as it is

[00:19:13] at the market declines. And so what happens is if you are actually trading implied volatility or selling implied volatility or selling the vix based on basically the lower bound of volatility,

[00:19:25] all can't go to zero, right? You have no room for air. So as soon as you get a little move in the S in volatility, then suddenly the people who are short-wall at, you know, an implied wall would say

[00:19:36] five or six, they suddenly go, oh, oh, and they have to cover, right? And they have to adjust their positions and that itself causes a short-term volatility shock. So you can see that if you ever

[00:19:48] draw trend lines on volatility charts, the options geeks will come out and start yelling at you about it, kiddo TA on trading analysis on volatility charts, right? But there are these wedge patterns

[00:20:02] that form all the time. And I think it's like this echo effect that happens where, you know, right now, all of us would love to sell 12, 15% implied volatility. So as soon as VAL pops a little bit,

[00:20:14] you come out and sell it, right? And then, you know, you get that echo response. And that's kind of what happened in XIV in, in VAL McGead and back in 2017 is everyone was shorting 3.5% realized VAL or

[00:20:26] like short ball at that level. And so as soon as we got just a little bit of extra VAL, right? Like 8% of all, it was like great. Let's sell that because VAL always goes down. And so once that VAL popped

[00:20:37] up for an inflationary reason or whatever else it was, people had to cover from these very, very low levels of volatility, right? So the point being that a lot of this is all relative,

[00:20:50] but there is a lower bound in VAL, right? And you can sort of lean on that forward expectation of saying, I can't be short this anymore because even if the market jumps a percent,

[00:21:00] I'm going to have to cover, right? I'm going to be in trouble. And that can cause some some spasms, short term volatility spasms. So as definitely talking about the fact that the video

[00:21:10] is kind of has been installed in here. Indeed. So in June, OPEX is where we called, you know, we came out and we showed all this data and video had the biggest call complex in the US equity space,

[00:21:22] very unusual for a video or a single stock to have a bigger call position in the market than like spiders. Has that come down now? Yes, indeed. Exactly. Yeah. Okay. So we lost a tremendous amount

[00:21:33] of in video call positions at OPS' expiration. And so interesting, you can see we peaked the Thursday before OPS' expiration and then we absolutely dropped very, very sharply. As you can see, it was

[00:21:43] a 15 to 20 percent drop from the Thursday before OPS' expiration to the, you know, Monday to after. And then we buy in large just sort of stabilized and trend sideways and trended sideways. In video digged a little pop recently due to the time on semi earnings, they said that,

[00:22:01] there are revenues are very good and they supply a lot of stuff to Nvidia and Apple. And so, you know, those two stocks caught a little bit of a bid. And our view is simply saying, look,

[00:22:11] and I'm going to get in this in a minute. So I don't want to cover too much of this particular juncture is, this stock has been outperforming the broader market at an unbelievable pace.

[00:22:20] And that's one thing for a mid cap or small cap name, maybe I'll perform the market at such a pace. But you're talking about the third largest stock in the world, right? Very unusual for

[00:22:30] that outperforms to continue and we had sort of felt like, okay, this outperforms is, you know, let's stick a fork in the relative outperform. It's an, and I'll talk about the

[00:22:41] get in a minute. And then, and then the last thing that we covered was how, how sleepy the small caps were and there just wasn't a great catalyst. And so you could see here that the cues were really,

[00:22:52] you know, holding out performance, it wasn't blistering out performance over the last multiple digital discharge shows. But then on Thursday with the hot CPI, excuse me, the cool CPI, keep saying hot CPI. The cool CPI, small cap, really jumped and they closed this performance gap in

[00:23:07] an instant and we're going to dig into some of that data too here in a minute. So that's the recap. I think by and large, you know, the, the optics views were pretty, we're pretty accurate. So

[00:23:21] kudos to you and me. What's with you? Because I didn't provide any insight, but still. So yes, it was we switched to what has, what has moved now or where we're going forward? Like,

[00:23:32] you've got this idea of uncorrelation. Yes. And so what was so interesting last week is all the sudden on Thursday, it's like fan record. I WM call volume. That's in blue here on this chart.

[00:23:46] I'm sorry to, it's not the most viewable, but this goes back to 2020. I wanted a really long-term chart trying to frame the nail. This home biggest call volume by far ever on Thursday.

[00:23:58] Putster here and read, you know, there's a decent little pop and put volume. But huge call volume in the IWM's last week. And if you look at, who'd you sorry about that? If you look at the IWM

[00:24:09] on buditrous, even though we had 3.9 million calls, which is an unbelievable number fried WM's trade on Thursday last week, call up an interest is only about 6% maybe 10% over the lows and so as you can see there's a one-year chart. Call open interest is not hit this extreme

[00:24:26] where you can go in my gosh. Like, this is an Nvidia level of overdone. So call volume clearly popping here, which is, which is, you know, a signal of I think longer term strength, short term,

[00:24:38] we're like a little bit overbought here, what this is telling me. But because this open interest seems like it has plenty of room to build, I think this theme of IWMs or the Russell Small

[00:24:48] Cap space may be closing some of the underperformers is quite possible. One of the problems in that I flag here about buying IWM calls right now is this is one month's skew, which is essentially

[00:25:01] showing you the implied volatility values of options that expire month from now. You can see that to the right side of this chart, the term structure, excuse me, the skew is very elevated. Right?

[00:25:10] So this shaded cone shows us the 90 day range of implied volatility for one month options. And we are way above for upside call strikes. We are way above that 90 day range. Now this is a function of the fact that IWM rallied 5 plus percent of the last two days,

[00:25:27] but also that called demand. And what this basically tells me is that if you're buying IWM call, you're buying it after the trade has already started to take place. Right? And so

[00:25:37] you are paying up a lot for those calls. And that generally to me says that we're short term overbought. Right? We need a little bit of pullback when you load a little bit of consolidation. That syncs

[00:25:48] up really well with options expiration this week. So we get some consolidation and that's a nice kind of like a trampoline or like a slingshot. You got to pull back and let it go. Right? And this

[00:25:59] pullback period is maybe coming up. I think here over the next couple of days. Yeah, it was crazy. I think last Thursday, I think it was B-Spoil that had this data. Like last

[00:26:07] Thursday was the second day ever that the Russell was up 3% and the SNP was down. So it's just crazy like the degree to which that happened. Yeah, it's uh there's so many crazy things like

[00:26:20] that going on. And you know, it's a great segue into some of the things that we're seeing here in the equity volatility landscape. So beautiful transition Jack Kudos to you who on that. Because these relationships are all super bizarre. Realize of all we already touched on that

[00:26:38] before we talk about correlation, I wanted to frame just how unusually SNP volatility is. Right? So the reason that this ties into correlations is because you likely heard about the correlation trade. There was like an odd lots of podcasts about it recently. It's all over the place. Right?

[00:26:54] And essentially what the correlation means is that the individual components of the SNP 500 specifically are moving a lot more and in different directions than the index itself. So what you end up having obviously is Apple and video, etc. Ripping and the index itself is being

[00:27:11] pretty sleepy and just kind of grinding higher. This chart we debuted in our April, Opx series and I've seen it all over the place. So I think we started a trend of looking at the

[00:27:25] market like this. But this is the number of days in the SNP without a 2% one day loss. In the great financial crisis that's 2007, we hit the most number of days ever at over 900 going into

[00:27:36] volume again. We had over 350 days right in that area without a one day loss. And now we are right on that same number. So it's an extreme number of days without a 2% one day loss. I think this

[00:27:48] is a function and if you go to our, if you go to YouTube, you look at volatility, suppression, spot, gamut. You can look at our video about this. But basically it's a function of

[00:27:58] zero DTE trading systematic call overwriting which builds up this positive game. I remember at the start we talked about positive game and how that suppresses market volatility. And then the third aspect is this correlation trade. Specific what happens in the correlation trade in the options

[00:28:12] land is people sell S&P 500 index ball and they buy single stock fall. So buying in video options or I'm going to buy in video calls and I'm going to sell S&P calls is a very crude way of looking at it.

[00:28:25] Now so yeah, please. I'm just thinking it's interesting because it must be tough to judge these things because I was just thinking like every time you have one of these, you've got like this

[00:28:34] different fact pattern. So like if again we had the short volatility ETFs. Now we've got these zero DTE options which weren't really a big thing. So it's like every time it's like yeah

[00:28:44] this can't go on any longer, but you also have to look at what are the circumstances that are causing it and they always seem to be different without it out. And you know, are we at the great

[00:28:53] financial crisis? I don't think so. I'm unqualified to make that comment. Are we at volume again? That seems more likely to me and I say that because it's positional risks, right? Where somebody's

[00:29:08] all sides on the, on the short wall product. Here I think people are off-size in their concentration of the top socks and the indexes as opposed to there being unlimited credit risk due to, you know,

[00:29:22] subprime mortgages or whatever else it may be, right? Which point is spot on, right? What is the, what is the cause? And the thing that when the Wall Street Journal posts this or Schwab posts this

[00:29:33] char or whoever, they don't ever talk about the other side of it. The other side is we've also gone we're going extreme amounts of days without a 2% gain. So interestingly, the largest ever time

[00:29:45] without a 2% one day gain is the great financial crisis. Because volatility just gets suppressed during those time periods, you can see going into volume again. We also had the second largest at least since the 2000s, second largest period of days without a 2% rally. We, if you added,

[00:30:05] we had one day this year where we had 2% rally. You probably remember what day this was, do you remember Jack? Was it in any earnings? It's very good, I need to do that answer.

[00:30:16] In February, in video blue out earnings and that lifted the S&B 500 by 2%. That was a February. We haven't had another 2% rally since. And so I don't want to say, hey, if you take that one day,

[00:30:25] we have a record but if you take that one day out and you add the pre-in video earnings to what's happened since, well, we're at volume and get in numbers, right? In terms of calm. So this is all

[00:30:36] very unprecedented. And so when you look at this stuff and people say, yes, the market should continue to rally and yes, this should happen. How many never seen before things end with the market just sort of

[00:30:47] saying, okay, that was a weird period. Let's continue forward without some sort of reconciliation, right? I think I don't know a stat check that. I just feel like in my 20 plus years of experience,

[00:30:58] when you see all these hey, never seen before things, it generally expresses in some sort of like spasm again where we sort of, all the relationships kind of fall back in order, right?

[00:31:11] Yeah, what was interesting in this 2% game thing, by the way, is the beginning of the tech boom, yeah, I wouldn't have thought that would have been on there. And I guess it was early before like the

[00:31:20] day before we started coming but yeah, and we had a huge run before the tech boom where there wasn't a 1 2% one-day game which surprised me. Yeah, and no, I don't know what the economic

[00:31:33] intricacies of the economic policies and things like that were, but what caught me about the great financial crisis is that there was all this liquidity flooding the system, right? And that created the

[00:31:43] conditions for the great financial crisis. And so I think when you look at globally in our last of activity, we're talking about how this short volatility trade or a lack of volatility was kind of a global phenomenon, right? We didn't have a lot of volatility in Europe in

[00:32:00] equities. We didn't have a lot of volatility in global credit and blah, blah, blah. And now we're starting to see that all get shipping up, shaken up a little bit where you had like the strange election

[00:32:09] in France, right? We're all started reacting to that. You know, we're having some spasms a little bit now. Like there's the underpinnings of things shaking up a little bit and I don't know if

[00:32:24] this is just a tremor and we'll continue or something that is positioned a little bit bigger. But again, I don't think this is the great financial crisis more just sort of a position on balance

[00:32:32] that has to get, I guess, reset. The 2% one-day gain stuff is interesting about the internet bubble as you can see, there's a small number of days that are 2% rally. But you did have unbelievable dispersion in that timeframe because those internet stocks were going so crazy.

[00:32:49] So we had record high dispersion during that timeframe. We have very, very high dispersion as we're going to show here in a chart in a few minutes because of these chip stocks, but we're not at

[00:32:58] you know, 2000 bubble levels yet. Um, implied correlation, which is measured by the seabull here. This looks at options that are one month, expire, one month. That's what you see in blue. Options that expired three months as in gold and what that looks at is implied volatility of the

[00:33:13] index, the S&P itself versus the top 50 constituents. So the lower this goes tells you that the higher the constituents ball is versus the index wall. Uh, we broke 2017 now. Uh, this past week, as you can see here, we've been below the 2017 low and three month correlation.

[00:33:32] So we have record low correlation. Uh, we've never seen a situation like this before where the index ball is solo compared to the single stock fall. Again, very strange, right? Um, in this

[00:33:43] turns to this interesting idea of correlation. Um, so a lot of what we've coded before in the April videos, the kind of sense was inter correlation, meaning how uncorrelated are the components

[00:33:57] of the S&P 500 to the index itself. So like Nvidia's moving so much and the S&P is moving a lot. This is kind of what I'm framing as in truck correlation where on this chart here, I have Nvidia,

[00:34:09] you know, which is obviously the king versus IWM, SMH spiders and the diamonds. And you can see heading into last week what was so uncorrelated. And in this quick plot since 2000,

[00:34:20] this correlation of the of the Dow is bizarre, right? And if you look at the components of the Dow, it's like Nike, bowling. I think was Walgreens in there. I mean the list of stocks in there are

[00:34:31] stopping grounds for he folks just the garment stopping grounds. Right now it doesn't have Nvidia. It doesn't have as as Apple, but it's missing. It's not tech heavines getting left behind. And then the components does has McDonald's stuff that they're just not doing very well. And so

[00:34:46] it is actually become inversely correlated to like the cues or Nvidia or uh, and some of these other indices, which is fascinating. Because it's it's rarefied air, right? Also after optics Nvidia correlates us now snapped back in line. That's what this blue line is.

[00:35:01] Stapped back in line with the cues themselves, right? So we talked about how uncorrelated it was into June, Opex. We removed all those big call positions. And now Nvidia is kind of following

[00:35:13] more and more on the broader indices, which I think is really fascinating. I also want to point you here to IWN, which is on gold, is in gold here. The color, um, it's still as a positive

[00:35:23] correlation with the cues and the spiders. But as you could see here it's fairly uncorrelated. And you know, you would understand this relationship a little bit better than me. But you know,

[00:35:32] it's not unusual for the small caps to be so uncorrelated. But this is the view heading into last week when I made this presentation. So by Ford one slide and you count for the last two three days,

[00:35:45] what you see is now IWN is now inversely correlated to the rest of the market slightly, specifically the spiders that I'm showing here. And so now the cues are spasming and excuse me, the IWNs are having these bizarre spasms. I've also added the TLT here which became positively

[00:36:01] correlated with equities, which is the long term bonds. And now that's having some spasms because rates may come down or we may get a rate cut due to the CPI in some of the recent inflationary data.

[00:36:11] So things here are under the surface, flapping all over the place in our, we're in this period where traditional relationships, longstanding relationships, IE all equities go up at the same time generally speaking or all indices go up at the same time at least.

[00:36:28] They're not that's not holding true anymore. Just one of one of the side as we go here like I just learned that I was like today, today your old when I realized that when you guys talk about

[00:36:37] dispersion options guys, you're talking about what's implied like 30 days out in the market. You're not talking about what happened in the past. Exactly because I said that wrong in a different podcast and some of corrected me and put the quote on there on Twitter to challenge

[00:36:49] me on that I had that wrong. Yeah so and to be clear about that when I was talking about these correlation indices they're based on one month options right those options expire in the future.

[00:36:59] So this is forward looking correlation which is why when we're talking in June about our forecast for saying I think ball is going to come down. Well the options market's pricing in lower correlation

[00:37:08] in one month and three month forward periods and so that is generally associated with volatility going lower and that is what played out and that's what what the value is here. I have a

[00:37:19] couple of charts we're going to show which the S&P global data analyst posted which is actually sort of realized dispersion like I see you want to call it that a realized correlation how the

[00:37:29] market's had been behaving and this chart here is realized correlation how have these relationships been behaving. This is a on the right here is the historical correlation matrix from early last week and you can see that typically again you know like the dial is has a 86 correlation

[00:37:48] with the IWM, right? Okay it dial goes up I know this typically goes up the Q-tip it will go up they're generally all pretty related right? You could see here there's this negative correlation

[00:37:59] over last month within video in the dial or SMH in the dial right there's the relationships when you see these blue squares means that things are not acting normally at all. Well this is

[00:38:10] that same grid matrix just updated for today and suddenly what you get and this is versus the spiders which is why some of the colors a little bit different but you can see here now the IWM's

[00:38:19] over last month are like in a different universe right? Things are just really walk you really shifting all over and the reason I showed this five versus TLT is because after that CPI print

[00:38:29] you also you know see that historically we get an inverse correlation between TLT which is the long bond ETF and the equity indices but now that correlation is mildly positive so again there's

[00:38:42] just all sorts of stuff shifting around here that is really rather unusual. What do you like how do you think about this stuff when you see these weird things going on? Like it's I'm wondering like

[00:38:52] how your average and death there should think about it? Like does it imply like high levels of risk because of all this weirdness is going on like how would we think about it? I believe that this

[00:39:00] is high levels of short-term risk so if you were to draw let's say a you know 200 day moving average of the stock market right that that 200 day moving average goes up you know from the bottom

[00:39:13] left on a chart to the top right and that's what the trend is. However if you were going to plot like a nine-day moving average you would see that we you would see that the nine-day moving

[00:39:22] average is now you know I don't know two standard deviations let's say above the 200 day moving average. We're overbought from that condition right there's all these bizarre relationships that is for short-term markets way above it's 200 day moving average and so we're due to correct I

[00:39:38] believe and when all of this stuff sinks back up it leads to market crash but that takes us back down the 200 day moving average and then we continue higher so you know I know that's a

[00:39:47] little bit of a bizarre analogy hopefully you can understand that the trend is still intact it's just worse so overbought from the trend line that you know we're due for a correction. And when someone

[00:39:58] like me sees something like you know the rustles up 3% in one day and the S&P's down like someone doesn't understand it that well like me how much of that was the options market that was

[00:40:06] driving that. When you have record call positions driving into the markets now you are getting a tremendous amount of short-term speculative behavior and when you get record calls being bought and or record call positions coming in that puts a massive impetus on dealers and market makers

[00:40:26] to have to chase the stock and options in my view are from that perspective their leverage right if jack if you buy one call option that is a potentially up to 100 shares of IWM at you know

[00:40:38] tens of thousand dollars of value that has to be purchased in order to you know potentially hedge out your one lot call option and so that adds to the volatility that adds to the volatility to the

[00:40:48] upside but when those calls are closed or shift around then that volatility also rears its head to the downside as well. And no other you know what other evidence than you need then what we saw

[00:41:00] into options expiration in video where you can see this column balance and you go hey like this we never seen something like this before we've never seen the call options complex so big and

[00:41:09] in video ever and then bam rate out options expiration the stock loses you know 20 30% in a heartbeat right but to the point on trend is we were super extended over that long-term trend and then

[00:41:21] simply we just came back to earth and now it's kind of back to its trend. So you you getting again these short-term spasms like the patient doesn't die just sort of like shakes around a little bit

[00:41:30] and then dust itself off right as a as a kind of a crude analogy. So on let's so the answer is probably a lot right like in terms of what happened that day option dealer flows probably played a

[00:41:41] pretty big role and what was going on. 100% you know that's what our business based on we watch this stuff all day long the the interesting thing now is you have so much short-dated options activity

[00:41:51] right that these flows come in today or they're impactful in a certain direction or a certain way today and then tomorrow it could be totally different right now what we see every day now

[00:42:01] is 0.DT tends to to buy the dip and sell the rip in the S&P 500 you lot of speculative call buying and whatever the hottest name is of the moment but that flow is short-lived obviously because it's

[00:42:14] here today gone tomorrow it doesn't translate into material positions oftentimes. If you get a lot of longer-dated call buying in different names like I love to see that because when you have longer-term positions that implies that there's longer-term hedges in place so I'd love to see

[00:42:31] you know call options you know one month two months three months out in time for IWM's I love to see those build up because I know if the stock starts to rally do you just have to continue

[00:42:40] hedging in that direction as the stock goes up. A lot of tension because we about like a mean mania right where people are buying into the news of something that's kind of what 0.DT

[00:42:51] option is like you have a stock go crazy it goes up 20 30% a day and if you see something going up 20 30% a day you go that's not sustainable right? Probably going to crash tomorrow and

[00:42:59] that's the kind of thing that you see when you get a lot of short-term options behavior too right oh it's all the 0.DT people buying today that rally could fade tomorrow you know in a heartbeat

[00:43:10] yeah and it's interesting because like fundamental guys like me we always we always have a fundamental narrative for days like that so you know the idea is like a inflation is coming down

[00:43:17] and rates are coming down small caps are more sensitive to rates so small caps should rally a lot and sometimes that's true but also sometimes on those days use got these options dynamics going on

[00:43:27] and then the thing just reverses so it's interesting we try to explain like he's one-day moves but sometimes it's something else besides what we think it is yeah and and so you know

[00:43:35] to your point what what should the IWM have moved up you know over the last two days is it is it 2% 3% I don't know but if you're going to tell me that there's record call volume of 3.9

[00:43:47] million contracts I could tell you that whatever the positive move was it was exacerbated by the options market I don't know exactly how to extrapolate you know that's impacts specifically but you can line up the correlation of largest moves ever with the biggest options positions right so

[00:44:02] you see those relationships over time and if you know that the options market is heavily involved with these positions then you can say okay great maybe I should sell some short-term calls or

[00:44:12] maybe I should wait for a little bit of a pullback then I can you know reallocate right I can add more to my long-term allocation if you're buying into the day where you had a you

[00:44:21] know four five million contracts call contracts traded IWM you're buying when volatility is very high you're buying you know kind of into the the hottest point of the of the move in my view

[00:44:34] and generally saying okay let's wait for the options market to cool off a little bit tell us that things are a little more sensible I could probably get a better price and then you know

[00:44:41] we base and sort of head higher which is what I'm sort of looking for in the IWM's now. So on this next slide you're looking at reallize correlation between the S&P 500 and the

[00:44:50] midcap and a small tap index yeah and you had mentioned this before about realized correlation you could see just here the quick takeaway is correlations very low realized we'll call it

[00:45:00] realize dispersion which is that blue line is very very high if you go back to 2000s you know this is the same general area in the in the large cap that's the S&P 500 but the dispersion is

[00:45:11] very high in the small cap and the midcap as well and this dispersion just says the individual components of the index are moving a lot more relative the index itself um this can happen when

[00:45:21] the market crashes right because all stocks go down but we talked about this in the March of 2020 crash all stocks went down but like cruise on is went to zero right whereas like hospital stocks maybe

[00:45:31] held up a little better for example um so you know dispersion with correlation going up is what you see during a crash now we have correlation going down but dispersion increasing that's a

[00:45:41] bubble sign right and that's what we're sort of watching for now. This map is from S&P Global I couldn't find it updated so this particular map ends in 2015 but it was so interesting to me about it was

[00:45:54] those bubble periods of 2000 in 2001 and so what you see here is dispersion was a lot higher in 2000s because like pets.com was just going at next level crazy dispersion was also higher in the

[00:46:06] 2008-2009 crisis but we're higher than we had dispersion wise in 2007 during the run up to the great financial crisis but correlation now is lower arguably than it's been in terms of realized

[00:46:20] correlation were lower now than we were during the internet bubble so this just puts us into place in terms of where we were during historic major moves on the market so you know not quite

[00:46:30] the internet bubble but correlation wise were were in kind of verified error. Can you just stop for people who don't know can you explain the different scenes dispersion in correlation? Yeah so correlation measures how each individual component of an index moves relative to itself so

[00:46:45] if we have all stocks crashing that gives correlation of one because every single stock is going down in this situation relative to breadth and things like that you've seen all these charts on

[00:46:56] sure where you know it's hey this is the first time that like under 80% of the S&P 500 components have gone down but the index itself still gained in price right? That is low correlation right

[00:47:07] because in video Apple they're going up but Nike and Boeing are going down right the components aren't moving in sync with each other. What dispersion measures is how far apart the performances of the individual components. So higher dispersion comes when in video goes up 50% Apple goes up 20%

[00:47:24] and then you have Boeing going you know down 5% or whatever it may be right the components of the individual indexes are their performances spreading out. If you have low correlation like we have now but really high dispersion that signals of a bubble period because you have certain

[00:47:43] sectors that are going crazy right AI and chip stock are going bananas and mega caps are doing really well but there's a lot of more traditional maybe value oriented names or whatever it may be

[00:47:53] that are being left in the dirt right left in the dust. And so you're getting high dispersion right because of just certain names are just going crazy while other names aren't doing much at all.

[00:48:05] So if we just had all stocks go up every day and every stock goes up 1% in unison then you would have a low dispersion high correlation market. Obviously now we have right now.

[00:48:17] No yeah we have these that's absent. And you kind of get it that in this next slide here you're talking about the deviation in returns depending on the index you're looking at.

[00:48:25] Yeah and this is a chart that I probably should have updated for today because of the fact that I do have the arms of about 5% so I do have the data going to be above the dial I believe

[00:48:35] but because of the 5% gain suddenly still way behind the cues and the spiders and the point is what stock you buy in this environment matters so much right because it's not a all stocks

[00:48:47] up phenomenon cues to great spiders doing great dial you're only up 4% this year as of Thursday or Wednesday or Thursday last week and out of the ends now because they gain 5% they were only

[00:48:58] up 1% into middle of last week right. And so you know this speaks to this uncorrelated dispersion trade in a way right because tech is doing great but everything else is doing actually pretty bad

[00:49:12] and I think about this because imagine being a manager that is more of the small cap space or underallicated to Nvidia and hey I got 6 months left in the year how do I make up

[00:49:22] this you know my equity underperformance it's probably you know an issue for a lot of managers at this point. This next one is really interesting this is this bad breath in terms of how much the big stocks are driving the market like I think I saw somewhere that

[00:49:36] I think Nvidia itself is might be like more than 4% of the move this year and these get it and maybe wrong but it's a huge number. It's incredible and so what this chart shows is

[00:49:45] the top 10 as a percent of the S&P 500 we're currently at 77.2% this comes from strategic ETF research as of 71 so this chart's about two weeks old now so this change may be a little bit probably not

[00:49:59] that higher that 77% is higher than any other period except for the Romool 2007 which was 78% of the index now these top 10 according to strategic says that accounts for 14.5% of the S&P 500 performance which interestingly is not you know those top stocks they've been a larger

[00:50:23] percentage of performance interestingly if you look at that historically so it's not as you know yeah is that just so what's the S&P return this year as of right now you know it's like

[00:50:33] that is the S&P 500 return it's 14.5% well that's that's that's that's that's as of that's as of early July so we gained another what two three three three how much they contributed to

[00:50:43] the return that's just the return correct that's just the return yes or yes or so the point is that you know we I guess 2007 was not a very good period for the market because you know it's 3.5%

[00:50:54] but you know 14.5% return is lower than we've seen for the next what is at 1015 times the time for instance on that chart I just want to bring up 2017 because the top 10% is a total in 2017

[00:51:07] which was this other year that pops up it's only 30% so it's more much more balanced so this speaks to the breadth right there's three stock which are 20% roughly of the of the index which I have this chart here which shows you the impact of that I'll get it

[00:51:29] a second but but basically I have Nvidia Apple Microsoft which is I think 20% of the S&P and it's 25% of the NASDAQ that's really pretty pretty wild route. And I wonder if this

[00:51:42] maybe has a question that we don't have the answer to you but like in terms of these periods where the largest stocks are driving the market those also tend to be periods where there's low

[00:51:49] volatility um I wonder is there any relationship there at all? I mean when you look at this chart you you can you could make that as suppose you could make that claim right the the in 1990

[00:52:04] sorry in in 2024 you know obviously we had that level of 2023 we're kind of coming off of a bottom a little bit um and you know really rallied so you don't think volatility is particularly low that year

[00:52:15] it's hard you know to your point I have not studied this there's not a clear correlation other than to say well 2017 pops up here 2007 was a very common year that pops up here but I have not it's an interesting idea I have not looked at them myself

[00:52:31] um I wanted to show this this is the next expiration stats for Nvidia Apple Microsoft and Tesla Tesla's one of the top names in terms of options volumes had great performance and

[00:52:42] what I wanted to show here was this is the percentage of volume that expires on the next Friday and I'm going somewhere with this right related to correlation uh 50 plus percent sometimes it's

[00:52:52] high 60% of options volume for these names is I call it zero dt that means it's just trading at the next expiration but you're talking only about 8% of open interest sits at that next expiration

[00:53:07] timeframe right and that seems to be declining as you could see on this chart so the point is is that there's a tremendous amount of day trading in Nvidia Apple Microsoft and Tesla in these top stops

[00:53:18] and so I think that there's a lot of trades now that are day trades let's call them high frequency trading center that used the options of Nvidia Apple Microsoft etc to trade maybe gets the S&P or internet amongst themselves um and I think that these have material

[00:53:33] impact on the performance of these stocks and so if you see headstratching bizarre moves in these names you have to look at the options complex to see was there just a ton of zero dt stock trading

[00:53:44] on this thing that's causing weird pacts of volatility or whatever may be um to your point before you have a lot of long-reterm investors that you know are trying to figure out well why did

[00:53:54] Nvidia just do that today or why did Microsoft just do that today and if you had several million in Nvidia zero dt calls trade uh in and out today what that could cause a lot of bizarre impact

[00:54:06] and so is this a zero dt still rising a lot or is it calm down? It's really flattened out so if you look at the S&P chart it looks like this where about 50% of S&P 55% of S&P options are zero dt

[00:54:19] it doesn't have particularly large open interest and we're not increasing really all that much. The trend is really plateaued across the board now you can have rolling names which suddenly spike up like IWM suddenly has massive next exploration as zero dt call volumes because of what happened last

[00:54:35] week and now that's sort of subsiding a little bit but you need to uh this 60% threshold we really don't see much higher levels in the S&P or single stocks over that so again it's it's the day

[00:54:48] trading that's having an impact. I wanted to look at this this was from Wednesday right? Wednesday we had a very sneaky bizarre move up in the S&P of 100 and the following day we had a big move down

[00:55:00] and there was interesting note from a Bloomberg reporter saying I can't figure out you know one good reason why the S&P was down so much today and she was talking about Thursday. Well I present

[00:55:10] to you this idea of breadth in the options market so you have 50 to 60% of volume is next exploration flow. What did that mean um this is on Wednesday what what were the impacts of

[00:55:22] these specific names to the performance of the S&P? This is just for Wednesday when the S&P is up about a percent. Well 19 or 20 bips of the performance from that day was just from Nvidia at another 13

[00:55:33] bips or mapo and 11 bips from Microsoft you end up with you know 20 or excuse me 40 to 50 bips of S&P 500 impact just from those three names right those three names going up more 5%

[00:55:46] what did push the S&P up 50 bips. The next large is component is Google, Amazon etc. Those are adding two three bips it's mostly meaningless. Now on the flip side of that there's these names that are

[00:55:57] falling off a cliff like mastercard or you know Costco had a really bad day last week. There's so there's so small as a component of the S&P 500 that they can crash 567 10% and they do nothing

[00:56:09] to the impact of the S&P. So this correlation when everyone talks about bad brettom it's a sign of just investors and two narrow of an impact from a more of a psychological perspective almost

[00:56:21] there's a positional or a hedging impact or a trading impact of the fact that these components are so large when you have zero DTE or next exploration options dominating these names a lot of times

[00:56:33] that tells you that the index itself is being dominated in turn because of the fact that 20 to 25% of the index component itself are driven by just these three names and so you have record call, piling to Nvidia next exploration. These people are day trading that jacks

[00:56:49] up in video which jacks up the S&P 500 and the next day those people don't care. They're only there for the day they're not they're not looking forward to month or two months or three months. They're

[00:56:58] they don't care. The next day they sell those calls or you know whatever they do right. There's they was some of the biggest call selling we've seen in a really long time in these top three names

[00:57:06] and these socks all crash and down goes the S&P. So this is the correlation spasm right. This is the essence of it. This is shown for just a single day again Wednesday but you can play this

[00:57:16] out in a daily basis right so when we're looking at all time low correlation or volatility being at record bows on the index you have these big three components they're whipping around can really dictate a lot of what happens on a short term basis on the index itself.

[00:57:32] Yeah, it was interesting because I saw this thing on that day where we had the Russell of 3% in the S&P down 80 basis points. The loss is the dollar losses like on the Mag7 stocks

[00:57:41] were so much greater the gains on the entire Russell 2000, the dollar gains. These companies are just so massive that we don't even like it's Apple bigger than the entire Russell 2000. I'm not sure

[00:57:52] if it is I thought at one point what I believe it still is yeah I mean after the lot of recently it's pretty amazing just thinking about like just these individual companies need more than like the entire Russell 2000. And not only that these are these each are about

[00:58:05] $3 trillion right in video I think it's silver that threshold they move 4% 5% a day it's incredible the volatility in those components and I posted a chart on Twitter slash x before just you know thinking about this. In video is 25% of the NASDAQ it's 20 sorry it's

[00:58:27] 7% of the S&P 500 it's sorry it's not 20% of the of the Qs I forget to consider this very high right it's 20% of the SMH 25% of the XLK right and so there are all these index funds that have to own a ton

[00:58:44] of in video just as a function of them having to track these major ETFs right and our major indices then you have in video triple-level ETFs which is I think $345 billion now in size so there are

[00:58:58] all these index demands for the individual stock itself then you have you know very large hedge fund holdings right and the point that I'm trying to get at is there's so much of the free flow

[00:59:10] or the tradable float that's just off of the books because of the fact that these index are the indexes have to hold the stock right and they have the stock light up locked up so what

[00:59:22] is the tradable float of like in video is it like half or a third of the free float and then you have record office trading and these in the reason the record office matters because there's

[00:59:32] hedging flows which have to be tied to the underlying stock itself in a lot of cases so what is the actual liquidity of in video or Apple or Microsoft I bet you think liquidity is just pretty

[00:59:42] poor and so that's why you're getting these giant moves right five percent up and five percent down just because there's just not enough stock to trade you know if that line of thinking makes us so

[00:59:54] on this on this next chart I think you have something similar you have in chart port yeah we're just also talking about the bad breath and in the fact that when you see you know in video in Apple

[01:00:03] and these stock really move up and down you start to get the tailwagging the dog a little bit what's so interesting about this is that we had ten days I believe it was is what the meat of

[01:00:14] this chart is showing where the vix was up as the stock market was going up right that was leading into early last week and so this is a stock-up volume environment because the components of the

[01:00:24] index are moving up so much themselves and obviously as I just you know outlined my theories to why this matters if you have a situation now where in video Apple Microsoft sell off some right

[01:00:35] they have a good sell off wall in the s of b of hunters not going to go down because of that right valve likely even increase um you can't have in my view stock up valve up which simply means

[01:00:46] these names are moving up so much that the volatility metrics are also moving up for these names when these stocks revert and go down we're likely to see index of all spike up as well

[01:00:58] so when I talk about these spazons when these names are are so over bought and over extended or if you have a rotation out of these names index small caps for breadth wide now

[01:01:09] when these names get rotated out of they're going to have a volatility sort of spazons to the downside in my view uh because of the fact that they've had volatility spazons to the upside right

[01:01:20] in other words you can't just have these names lean out you have to have sort of a kind of a large move down a little bit of spazon down in order for breadth of wide now well cuz they're so

[01:01:30] such a large component of the s of b of 500 if those three stocks go down the s of p's going to get pulled down as well so you had this situation before we mentioned this was like the biggest

[01:01:39] move up in the iw on for a negative move in the cues right one of the larger ones on record that's a function of what happens here if you're going to rotate out of the s and p uh and go

[01:01:48] into small caps you're going to get these big three names going down which is going to weigh down the cues a whole lot it's going to weigh down uh the s and p a whole lot which means that the

[01:01:59] rotation out of the cues and spiders is going to be more violent right and then the rotation into into the iwons is also going to be a little bit more violent you can't have just this smooth sort

[01:02:08] of sector rotation out of of equities and further I'd note if it was a rotation out of equities you'd see all equities down instead of what clearly looked like a rotation out of you know tech large

[01:02:19] cap into uh into small cap so all right let's get to the punchline here we talked about wall being low and correlation being low we're seeing a lot of record looking put call ratios

[01:02:32] which is generally an overbought signal as well where we're obviously seeing that what we talked about in the iwl record calls or record puts trading is often an indication of in term highs

[01:02:42] and lows so that's why we're watching the put call ratio here which is obviously higher than we saw back in 2021 the key here is that the the breadth of what's receiving record call positions is pretty narrow in 2021 everything was getting a ton of call positions now we're seeing

[01:02:57] smaller tack vector so to speak in video get a bunch of calls i'd be able to get a bunch of calls but you don't see big call positions in a lot of the other uh 490 you know s and p 500 names

[01:03:10] last chart I'll talk about this before I move forward is this is from the cbo this shows us that single stock wall is the at a record versus index wall so we're talking about the impacts

[01:03:19] of correlation all stuff this is simply saying that the volatility levels the implied volatility levels of the components are higher than ever against the index itself it's very unusual this would rectify with single stock in index wall spiking at the same time to my last point that's why

[01:03:37] I think we could get a spasm where we just sort of get a decent drawdown you know 345% as a lot of these relationships reset last thing just to note short interest I thought decision that

[01:03:51] as record loads per or believe this is JP Morgan just another one of these charts that is extremely bizarre right and if there's just a little bit of shorting in the market you know what

[01:04:00] happens at some of the face of some of the liquidity um so July objects what to watch and we're getting along this video so I'll be quick here we see just this pile into this is the Russell

[01:04:12] futures versus the Nasdaq futures I'm looking for you know someone where around a 3% pullback to the stats we initially talked about here in the queues uh you know similar pullback in the

[01:04:23] Russell and then that's kind of a launch pad for new highs I think uh moving forward and I do think that we're going to see the small caps in breadth wide now however because the concentration is

[01:04:34] so high in these certain stocks I think that the queues and the spiders are going to underperform in risk a larger pullback here in the short term as a lot of these relationships sort of

[01:04:45] shift back to normal right these relationships normalizing um I think have to normalize with the bigger pullback in the queues and the spiders whereas the IWM is maybe able to kind of catch a

[01:04:55] stronger bounce single stock side I want to talk about Tesla Tesla Tesla's up just a tremendous amount you know 40 something percent over the last couple of weeks uh the positions we're going to

[01:05:08] lose about a third to a half of positions this expiration in Tesla as you can see via my right era most of those positions are concentrated right around this 256-60 area that's stabilized

[01:05:18] Tesla in this price range we're going to lose some of that the Tesla Robo Taxi situation got punted October earnings are coming up next week I think this is a timeframe or where Tesla's

[01:05:29] going to retrace a little bit uh rebase looking for that 225 area as a short term support for Tesla so I just wanted to give a future look uh for a specific stock that has a ton of options

[01:05:41] positions here again this is being an opx driven pullback of about I would say 10 percent is what I'm looking for in Tesla uh involves here in Tesla as that uh Robo Taxi news came because he

[01:05:53] evolved from last Monday was here at the gray line that falls now come down after that Robo Taxi news has pushed off so this tells us that cold and uh called him in is cooling that generally sinks

[01:06:04] with uh a stock that is going to come down as well so and this next one you're talking about some potential paths here yeah and this assumes out to the idea of correlation and how we normalize

[01:06:16] in a lot of these relationships uh that that are you are weird number one is breath lines out and that's broadly seen as supportive of stronger equities uh maybe trump being the favorite in the election and CPI coming down and soft landing maybe that'll come into purview

[01:06:31] people rotate into the names which is just underperform so much and that would be a great bullish signal I don't think that we can normalize and have Nvidia and Apple and Microsoft not

[01:06:42] correct relative to these other stocks um but that breath-widing out would be I think what bulls really want to see and there's some evidence that that could happen now so we have to respect that

[01:06:52] if we get an opx pullback you know that would be a good time to maybe uh look at buying some some of these names uh that that could benefit right that or that had not performed so well.

[01:07:03] Second the other way that this would work is it if you get a rate jump which doesn't seem to be on the table right now some type of credit event which doesn't seem to be on the table right

[01:07:11] now because obviously uh people are now pricing cuts uh geopolitical seems to be fading the little bit at least it's not hot like it was recently uh or if we have an issue where

[01:07:23] Nvidia earnings aren't that great or some of the AI names don't seem like they're gonna you know have great names that we lose that narrative or that dogma uh that then drains off the components

[01:07:33] right that are leading the market so if any of those happen you can see the market violently spasm where correlation really shifts up involved jumps a lot uh as a result this is kind of

[01:07:43] we saw preview of this in April right S&P dropped 5% over that same time for a Nvidia dropped 20% over the course of about a week. VIX moved up to 20 correlation jump

[01:07:53] now that was sort of the kind of thing that we are uh that's kind of like a baby spasm right that we'd be looking for those concerns all were averaged and then we started to rally again

[01:08:03] but that was sort of a little appetizer idea of the type of move that I would expect to see. Now a real credit event does happen or some other event does happen the net 5% move and the

[01:08:13] S&P is gonna be you know more like 10% in the S&P um but at the moment this does not seem to be on the table with the developments over the past week um and listen actually you're getting any more

[01:08:27] detail on the correlation online. Yeah exactly and I just wanted to again frame how bizarre some of these moves are we talked about correlation a lot in April here's the rethinking where correlation just jumps so high and you can see that synchronizes with vogue jumping quite

[01:08:40] so the point here for most of you in in longer with longer term lenses is if you see a big move down and you're scratching your head's fingers that's scratching yourself scratching your head

[01:08:49] thinking why why is this moves so big I don't get it right if those words are coming out this doesn't make sense you need to look to this relationship this position relationship in the options

[01:09:00] impact of the market movement all all last week with iWMs and some of the weird behaviors as an exacerbator or bringing leverage into whatever move we're experiencing right so if you

[01:09:11] if you find yourself going like I don't get this move it doesn't make sense look at the options market realize that those moves that you're seeing could be magnified quite a bit uh by by what

[01:09:20] we're seeing uh or these bizarre relationships um and to this point here this just shows you that when you had stock up valve up an Nvidia when the stock crash is valve remains high right

[01:09:32] which is not to say that uh which is just simply to say that if these big three correct uh that likely invokes or brings up let's say the vix as a measure of index volatility um you know this

[01:09:43] inflation inbound people are time out trump possibly being inflationary uh I thought this was an interesting chart because the point here being that we're coming up into a election cycle now

[01:09:53] where people are unsure of the election risks I think maybe there's not so many risks but what are the policy impacts of the various uh you know possible presidents and what they may do uh inflation is

[01:10:06] a concern when you go forward and all I'm trying to bring up here is the yield card seeds is shift a lot when trump was favored out of the debate this is what this chart is based around um I don't know

[01:10:15] people are going to continue forecasting that I think Morgan or somebody uh bank of America put out a note today saying no trump won't be inflationary I don't really know all I'm trying to say is that

[01:10:24] there's there's the potential for a lot of relationships shifting again as we move to election and when these relationships shift you could really have an impact on these correlation positions that we've been talking about a lot um this chart obviously needs to be removed as of this morning

[01:10:39] because I think trump has jumped so much this chart shows the Biden Harris uh you know odds who knows what's going on with all this after the events of uh yeah what's what's interesting

[01:10:50] those it probably means you know what happened probably means Biden stays in Tom so I would guess if you updated this Harris is probably falling a lot um because nobody's gonna want to run against

[01:10:58] trump right now so the odds are they probably you know the stuff about Biden dropping out probably goes away yeah you might guess that's extremely insightful and that's a second order thought

[01:11:06] that uh I wouldn't have come up on even if I had to think of it sort of being so good as to you and and you know it's so funny I was like scrambling thinking all these charts change so much just

[01:11:16] because of just what happened on uh you know on Saturdays really pretty remarkable this is here is the point on France volatility uh this is the cac one month implied ball just the point that

[01:11:28] you know gone from record come globally and now you have elections shifting expectations shifting ball you know you have a lot of big banks in in France obviously and if they had problems just as

[01:11:41] an example well that's gonna the butterfly effect here in the US right so we're all linked here and when you start to get you know spasms of things around the the world that can affect

[01:11:51] particularly US volatility market so uh just another example something that could have popped up not sure what the situation there is in France but you know things are obviously really quite dynamic

[01:12:01] last but not least is this is the fragility index this talks about the liquidity of um markets be they basically does this uh test where they look at uh realize of all uh I forget the exact

[01:12:15] metric here but essentially what they call as the fragility index and it's essentially how much can big components move this the stock price and we're at what they call record fragility and again

[01:12:24] all this simply says is you have you have situations where like sales force can drop 5 to 10 percent Delta Airlines was down 10 percent last week you have cost go drop a percent those moves are bizarre

[01:12:35] they are very unusual and I think it speaks to this idea of a lack of liquidity generally speaking in the market and why that's because of these index sort of effects or whatever else it may be things are moving

[01:12:49] based on this data it is unusual how much stocks are moving there's not a lot of liquidity in these names and they seem to bounce okay afterwards but when you have all these bizarre relationships

[01:12:59] and then you have these options flows which can I might be like forced flows right like I have to hedge my call position it's like a Marshal call I'm going to buy stock here and it's

[01:13:07] going to drive the stock up um you know I don't have the I can't sit around and wait to average in like a value investment so this fragility is just something to also consider when we're talking

[01:13:17] about the normalization of stock movements well this is really great because for me one of the things I think is really cool about this is even if you're a long term investor like I am

[01:13:28] we're seeing all these crazy things happening on a day-to-day basis and even if you don't do anything with it the ability to understand it I think is so important and like that's what I really

[01:13:36] liked about this and it's what I like about doing this podcast because now I understand like sometimes it'll overreact to me because if you don't understand what they are like if you think there's some fundamental driver if something going on in the market and the reality is it's

[01:13:47] just going on something's going on the options market you might make the wrong decision based on that so yeah I think it's really cool if it's been cool for me and I think it's cool for long term

[01:13:53] investors to understand this under the hood stuff so we can better you know put it in the right context with our portfolio's yeah this is that good right I think a lot of people say hey I don't

[01:14:01] trade options so I don't want to look or care about this information and you know my my so box is saying this stuff is driving a lot of the names that you trade every day and while some of them may be a little

[01:14:11] more short term in terms of its impact if you're looking to allocate into a name or take some off the table if you know that hey this move is overdone because of an options then selling into

[01:14:21] that or buying a dip around or whatever may be I think it could be extremely advantageous you like Delta Airlines last week we're looking at it there's no put positions below 42 in the stock

[01:14:31] I've been seeing the stock this morning but that was a great entry point right and why did the stock drop so 10% well options positions are there you have this fragility index those kinds of things so

[01:14:41] you know it can really help put moves into context to your point yeah thank you everybody for joining us and we'll see you next month they check this is Justin again thanks so much for tuning into

[01:14:51] this episode if you found this discussion interesting and valuable please subscribe and either iTunes or on YouTube or leave a review or a comment we appreciate the opinions expressed in this podcast do not necessarily reflect the opinions of the capitol no information on this podcast should be

[01:15:05] construed as investment advice security's discussed in the podcast maybe holdings of clients of