Options Market Update February 8, 2016

The past week ended in a mini-crash for many tech stocks and the Nasdaq, and while the Dow and S&P also lost some ground, they did hold up much better. For the week the S&P 500 lost 3.1%, the Dow fell by 1.59% and the Nasdaq dropped 5.44%.

For the bulls, Friday’s awful market action should be concerning as the rolling bear market has now seemed to have shifted to technology stocks. However, the Friday Jobs Report showed that the U.S. unemployment rate fell below 5% for the first time since 2008, and formerly beaten down sectors are finding buyers as the Industrials and Materials sectors have held up amid the market selloff.

For the bears, Friday’s price action was nearly ideal, as former market leaders such as Facebook, Google and Microsoft, which had recently handily beat earnings expectations, were crushed. Also, the Jobs Report was disappointing as 151,000 jobs were created versus expectations of 188,000, and manufacturing data continues to disappoint, which is raising concerns about a U.S. recession.


The Chicago Board of Options Exchange Volatility Index (VIX) closed the week at 23.28, higher by 15% for the week. While the VIX was higher for the week, it was not nearly as high as many had expected given the extreme selling on Friday. I attribute this “complacency” in the VIX to investors becoming more comfortable with the selling pressures in the market. Also, the market has yet to have a real flush lower, rather it’s been a slow and steady bleed. However, if the market were to break the January lows in a fast manner, I’d expect the VIX to spike back to around 30.

Events for the Week to Come

This week is full of earnings reports, economic data releases and Fed speak, including Fed Chair Janet Yellen on Wednesday and Thursday. However, traders will likely be more focused on how the market will react in the days following Friday’s technology sector selloff. The selling pressure that had started slowly on Tuesday accelerated on Thursday afternoon after LinkedIn (LNKD) and Tableau Software (DATA) released earnings that missed expectations. By the close of trade on Friday, LNKD had lost a staggering 45%, and DATA had fallen 48%.

I will be focused on how the “high valuation” companies due to report this week respond to earnings. For example, Yelp (YELP), Twitter (TWTR) and Tesla (TSLA) will report earnings in the coming days and could see extreme volatility.

What Traders are Saying

At some point last week, money started flowing into beaten-down materials stocks, and out of growth and technology stocks. The sudden sector rotation seems to change directions in the blink of an eye, and can ruin the best of trading plans. For example, when Facebook (FB) reported earnings, the stock gapped up to 107 on the open the first day after earnings. I was seriously debating recommending buying a call, but there were cracks in the foundation of the market at the time so I chose to give it another day or two to see if the market would stabilize. For the next three days, I watched the stock soar to a high of 117.50 and I was furious at myself. I had seen my ideal setup with the stock gapping up on earnings, but had not pulled the trigger on the trade.

Fast forward to Friday, and the stock was trading lower by 6.50 on the day, at 104, and I literally have no interest of buying it into the close. So why would I love the stock at 107-108, but have no interest, just a week later at 104?

When the stock was trading at 108, I figured that there would be hedge funds, and institutions lining up to buy the stock on any pullback. However, when the rolling bear market focused its attention on technology shares and market leaders such as Google and Microsoft, the floor for these stocks was reset in my mind. If the institutions, hedge funds and sovereign wealth funds need to raise cash, there is not a level at which they won’t sell.

Another phenomenon we saw at the end of last week was traders selling “over-owned” stocks—the stocks owned by a large number of hedge funds and institutions, stocks like Facebook (FB), Microsoft (MSFT), Starbucks (SBUX) and Home Depot (HD).

When the rotation will turn back into these stocks is anyone’s guess. However, just know that the downside in stocks you love could be much lower if this is just the beginning of the selling in the growth and over-owned stocks.

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