Wild Friday
Some may have thought a good jobs report would slow the correction. That’s not how this market works. What’s good for the economy is bad for the tech stocks which means the indexes fall. 10 year bond yield rose 8.3 basis points. If it continues to rise next week, there should be further pressure on tech.
Anyone thinking Friday would be calm because it was the day before a 3 day weekend was very wrong. There was a lot of intra day volatility. From 9:40 to 10:45, Tesla fell 10.6%; then from 10:45 to 3:30, it rose 14.2%. Those are massive moves for the most important stock in this market. Apple had similar action as it fell 9.2% and then rose 10.2% in a similar time frame.
Therefore, it’s no surprise that the $34 billion in notional QQQ value traded was the highest ever. As you can see from the chart below, the past 2 days had higher turnover than any point in February or March. Prior to this year, the record was $26 billion in September 2008 when Lehman Brothers failed.
Action was unbelievable when you consider that there was no news. Nothing caused the volatility. It’s just that euphoria got so high, the tech stocks had to fall. They haven’t yet cratered like they can when there is a real panic. News reports suggest that it was Softbank buying calls that drove the Nasdaq up so much. That differs from the reports that the market has been driven up by retail investors.
Retail doesn’t have that much money. You can look to them to judge sentiment, but they don’t actually move prices. Everyone knows stock splits don’t add value, but people bought Tesla and Apple because they thought other people didn’t know this. People betting on other people’s ignorance drove prices up which is obviously unsustainable.
Huge Nasdaq Volatility
Only people with their head in the sand thought the market wasn’t about to have high volatility. Volatility will come from a tech crash not because of the election. As you can see from the chart below, the Nasdaq’s volatility reached 40.91 which is the highest since April.
We are likely about to have a mini-2000 tech bust where the Nasdaq falls 30% to 40% and value stocks outperform. This will surprise some people because there won’t be an obvious catalyst for the decline like COVID-19 was in March.
Tesla Wasn’t Added To S&P 500
Three catalysts for Tesla stock were battery day on September 22nd, the stock split, and being added to the S&P 500. That stock split already happened, so the hype about that is gone. There won’t be another split anytime soon. Hype about battery day won’t be met. We will see if I’m right soon. On Friday, the S&P 500 updated which stocks would be in each index (large cap, small cap, and mid-cap) for the quarter.
Tesla wasn’t added to the index. Those who are saying it’s only a matter of time before it’s added are missing the point. Tesla was specifically excluded despite having 4 quarters of GAAP profits because its profits were from tax credits. This means Tesla will need to show outright profitability before it’s added. That’s not happening for several quarters. Speculators who bought Tesla because of this sold it after hours. The stock fell 6.4% after hours. It will likely fall further this coming week.
Bulls will try to claim they own Tesla for the long term, so this doesn’t matter. They aren’t being honest with themselves. There was huge hype around S&P 500 inclusion and it didn’t happen. Same will happen at battery day. There is hype about a 1-million-mile battery, but Tesla doesn’t make batteries.
Technology already exists, but Tesla won’t be the only company to benefit from this. Another electric vehicle company, Arcimoto had a double top and has fallen 34.3% since August 13th.
By the way, Etsy, Teradyne, and Catalent were added to the S&P 500. H&R Block, Coty, and Kohl’s were pushed down to the mid-cap index. Another bubble stock, Wingstop was also added to the mid-cap index.
Details Of Friday’s Action
S&P 500 had wild action that was slightly less pronounced than what happened to Tesla and Apple. If Tesla had been in the index, it would have been even crazier. Investors wonder how much Tesla stock would have rallied if it was added. Index buyers would have been forced to buy an extremely expensive stock that is vulnerable to a crash.
Specifically, the S&P 500 fell 3.5% and rose 3% intraday. It closed down 0.8%. Nasdaq fell 1.3%. It’s now down 6.2% in the past 3 days. Russell 2000 fell 0.6%.
Banks beat out tech. Financial sector rose 0.8% and tech fell 1.4%. Regional banks rose 2.1% and cloud stocks fell 3.5%. Cloud index is down 11.1% in the past 3 days. Zoom is down 19.2% in the past 3 days.
VIX fell 2.85 to 30.75. It’s rare for the stock market to fall this much and the VIX to fall sharply. VIX likely fell because volatility was curtailed in the rally following the morning selloff. Volatility was low compared to early in the session.
Conclusion
Friday wasn’t anything like a typical day before a 3 day weekend. Leading up to this correction, extreme call buying in big tech stocks caused dealers to buy these stocks to hedge their position. That created artificial demand. Then the call buying went away and dealers stopped buying. Then there was panic selling among speculators.
There was massive notional QQQ value traded. Past 2 days were record highs. This is similar to the short VIX trade unwinding in 2018. If that’s the case, the decline in the big tech stocks isn’t over. Even if that madness is over, these stocks are still highly overvalued and should fall in the near term.