— Back then, we would have a stellar month, followed by retracing most of the gain the next month, and so on.
— Recently, however, the reasons for the exaggerated moves appear less related to the economy or company earnings per se.
— Of late, these moves are technically driven. In particular, new derivatives are adding to market volatility. The derivatives market (options and futures) is rapidly approaching One Quadrillion Dollars. Yes, folks, that is One Thousand Billion dollars!
— In particular, the options market has become the proverbial tail that wags the market instead of the reverse.
— Rallies start with the usual short-covering but then move into self-reinforcing boom and doom loops due to “Gamma Squeezes” in the options market. “Gamma Squeeze” was an esoteric term back in the day.
— The introduction of daily options (so-called zero-day to expiration) over the past year has resulted in a parasitic exaggeration of the indices that never existed before.
— Due to these Gamma Squeezes, the sudden rips up and down will continue as long as daily options exist.
— This volatility can be an advantage to traders once we accept it as the permanent reality.
— Unsurprisingly, then. the darker side of this latest rally will return soon.
— And in the current situation, the underlying market structure is weak due to the quick rip and six unfilled gaps.
— Also, the volume has diminished daily with this recent impulse wave. It is also below average, making me question the current move’s sustainability and whether the rally will be retraced. Even a half retracement could be fast and unpleasant. And “overbought” does not begin to describe current conditions. We are up 15 days without tagging the mean.
— Upcoming Fed minutes, something on the global front, or even the wrong move by the Orwell Administration could be the next catalyst.
— And someday, we will witness an epic meltdown as the counterparties fail to meet their obligations on many of these instruments.
— I’ll do my best to help you navigate these waters, but keep your seat belt on.
— I doubt I will publish anything before the holiday, so enjoy Thanksgiving and we will be back next week.
A.F. Thornton