Options Market Update: Rough Week for Ackman

Fueled by Central Bank easing and strong earnings from the largest technology companies, the market exploded higher last week, and is on pace for its best month in four years. For the week, the S&P 500 gained 2.07%, the Dow added 2.5% and the Nasdaq jumped 2.97%.

For the bulls, the S&P 500 is now approximately 11% off its August lows and virtually unchanged on the year. Last week’s rally was aided by comments made by European Central Bank President Mario Draghi, who hinted that more stimulus is available if needed, and a surprise interest rate cut by China’s Central Bank on Friday morning. Also, earnings from Amazon, Microsoft and Google fueled an explosion higher for the Nasdaq on Friday. In addition, Jobless Claims and Existing Home Sales continue to be bright spots.

For the bears, it was a challenging week as there was plenty of bad news, but the market shrugged them off. For example, China GDP grew at a disappointing 6.9%, but the country’s Central Bank cut interest rates. And though U.S. retail related companies have been reporting disappointing earnings, the advance in big technology stocks far outweighed those negatives. However, biotech and pharmaceuticals remain under pressure and cybersecurity stocks have been weak.


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 14.46, marginally lower than the week before. On the one hand, the VIX being virtually unchanged is surprising because the S&P 500 advanced 2% on the week and Central Banks have been accommodative, which should support the market. On the other hand, put protection has become cheap, and with the global economy again weakening, traders could be simply buying cheap portfolio insurance.  

Events for the Week to Come

This week is extremely heavy with economic data and earnings releases, highlighted by the Federal Reserve meeting on Wednesday (the market expects no rate hike) and earnings from companies such as Alibaba, Ford, Pfizer and Apple.

It will be interesting to see in the coming week if earnings continue to push the rotation into industrial and technology stocks, and out of retail, biotech and cybersecurity stocks.

What Traders are Saying

Hedge fund titan Bill Ackman was one of the best performing hedge fund managers in 2014. He is known to be one of the best in the business. Last week, many of the stocks Ackman invests in had a rough week.

As of Ackman’s latest filing, nearly 30% of his hedge fund’s capital is invested in Valeant Pharmaceutical, which fell by almost 45% at one point last week. The stock is also widely held by other hedge funds. It had been under pressure along with many biotech stocks in recent weeks but selling accelerated when short-selling firm, Citron, compared Valeant to Enron.

During this intense Valeant selloff, other Ackman holdings also saw declines and put buying. On the flip side, his big short position in Herbalife (HLF) rallied and call buying was extremely brisk.

We will never know if the action was caused by other hedge fund managers trying to put a squeeze on Ackman or if Ackman was trying to raise cash to protect himself. Regardless, it’s always interesting when a stock or a sector “blows up” to see who has the most exposure and what the rest of their portfolios hold.

Stock Picks


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