In line with our expectations in our 17 May note A not-so-big-short 3.0–Asymmetric risks to the downside, the Nasdaq has sold off 2% from our puts entry point, as Nvidia the star child of the US stock market lost c.12% of its market cap, retracing from what appeared to be an over extended move to the upside post its Q1 results while in Europe the STOXX 600 posted almost 1% gains, rebounding from oversold levels as worries about political uncertainty appeared to reside. We maintain our short-term bearish view as risks persist from ongoing and rising geopolitical instability and the unwinding of the Tech/Energy pair trade, markets continue to price in clear blue skies while the consumer and job market show signs of cracks, a weakening liquidity impulse and heightened volatility as a result of the recent reduction of market gamma. We reiterate our Sep24 440 puts on QQQ.
Last Friday’s option expiry has been one of the largest in history, with over USD5.1tn in notional open interest expiring, surpassing the previous record of USD4.9tn from December 2023, which preceded the market sell-off. Additionally, the substantial long gamma positioning estimated at around USD10bn going into the expiry is expected to have fallen by half post-expiration with NVDA, the main driver of the market surge, also estimated to have lost half of its gamma, potentially stalling its momentum and increasing downside risks for the broader market. In terms of positioning, hedge funds have been selling the Tech sector over the last few weeks while extended retail participation is reflected in record weekly flows in tech focused funds, suggesting late peak euphoria in the sector. This is also reflected in net call volumes in tech stocks surging to record highs last week, surpassing even pandemic levels and diverging from the rest of the market, further indicating heightened risks of a potential market reversal ahead. In addition, roughly 80% of the SP500 are now in buyback blackout period which will be headwind for stocks as significant buy-side pressure that supported the market now vanishes.
In the US the main focus during the week will be the Presidential debate on Thursday and the PCE report on Friday where the recent slide in core CPI and weak retail sales suggest downside risks to spending, with the potential cooling in consumer demand strengthening expectations for the two quarter-point Fed rate cuts starting as early as September. The market is forecasting a 2.6% YoY rise in the US core PCE deflator. In Europe, the French election on Sunday will be the event of the week with opinion polls showing support for Le Pen rising to 33%, versus 27% for the NPF and only 20% for Macron. We also get CPI for the Eurozone on Friday where the HICP is expected to come in at 2.4% YoY.