Weekly Update

The Nasdaq Rally “Whale”

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Published September 11, 2020

The recent stock market pullback has thus far basically reversed the August surge. Our focused Nasdaq 100 (QQQ) dropped to its 50-day moving average for the first time since the rally began in April. The rally in August (blue arrow below) has been, in part, attributed to a multi-billion $ options bet made by tech investor Softbank.

QQQ August rally

That rally has now been undone over the past few trading sessions. For more information on the huge Softbank trade, we turned to 361 Capital’s weekly blog. The excerpts below go through some charts on the surge in options activity, as the Softbank action sucked in many other momentum investors (it seems to have been unknown at the time that Softbank was the “whale” investor behind the surge in options volume. That was first reported by the Financial Times after the calendar turned into September).

The first chart shows the sharp rally in growth-oriented stocks, such as those in the QQQ, resulting from the options activity. Growth stocks have been outperforming value-focused stocks for years now; but nothing like what we have seen recently (shown with the orange bar on the right).

Sharp rally in growth-oriented stocks

SoftBank is the "Nasdaq whale"

Retail Traders followed


A second topic of interest we pulled from the 361 Capital blog is the rising inflation sentiment. It is widely believed in the investment community these days that the Federal Reserve’s aggressive moves in recent months are certain to lift inflation (one reason why gold has done so well). Of course, inflation expectations had reached historically low levels. So, you could easily argue there was nowhere for inflation expectations to go but up! The first chart shows that those higher inflation expectations have not bled through to interest rates yet, which is unusual. This suggests that investors expect “real” U.S. Treasury rates (aka rates adjusted for inflation) to “go negative” by quite a bit in the coming year or so. That could be seen as a disconnect between stock market expectations and the bond market, where the bond market doubts there will be enough economic growth to push the Federal Reserve to lift interest rates over the next year.

Inflation Expectations vs. Treasury Yields

Whatever happens with inflation, Softbank, the Nasdaq “whale” of August, is betting heavily that stocks will find their footing and do quite well. As we’ve noted in recent weeks, that stock market rally is likely to wait until after the election. December has historically seen a very strong rally “in relief” that the uncertainty of the election is behind us.


Market Update

Markets entered the fall semester this week with tech/consumer stocks continuing their recent pullback while other sectors held up just fine. Coming back from the Labor Day holiday, traders sold off stocks in a big way. The S&P 500 slid -2.8% with market leader Apple (AAPL) down almost -7%. Oil prices skidded when Saudi Arabia lowered prices in a nod to a weaker demand outlook. The downdraft was bought Wednesday with a +2.0% rebound as investors looked past the halt of AstraZeneca’s (AZN) Covid-19 vaccine study. That rebound was given back Thursday as volatility continued. The S&P 500 opened higher before slumping -1.8% with tech/consumer leadership continuing to be under pressure. Other cyclical sectors such as materials, housing and transportation, meanwhile, seemed largely immune to the selling. Friday delivered another up and down day with stocks ultimately closing flat. Amazon (AMZN) fell below its 50-day moving average, a reference line of the uptrend, while the Nasdaq 100 (QQQ) managed to hold above that line, barely. Of note, the volatility index (VIX) fell throughout the week as investors sought less market protection, surprisingly, in direct opposition to the selling that stocks were seeing.

Stocks posted a second week of losses to unwind most of the gains from August. The S&P 500 tumbled -2.48% to close at its 50-day intermediate-term moving average. The Nasdaq 100 (QQQ) also closed on that same closely-followed moving average with a -4.63% swoon. Small-cap Russell 2000 (IWM) index fell -2.39%, appearing to roll over in recent weeks as Congressional stimulus talks go nowhere.

Warm wishes and until next week.