Unbowed by $2-tn rout, day traders return to bullish stock bets

Bloomberg | Updated on September 10, 2020

‘You’d probably need to see a lot more pain inflicted before you started to see more hesitance on the part of the retail crowd’

Retail investors, whose hand-over-fist buying this summer supported one of the fastest rallies ever, are proving as steadfast as they were prescient.

Not only did they hang tough as equities cratered the past few days, data suggests their animal spirits were flat-out stoked by the mini-crash, which erased $2 trillion from equities. Whether indiscriminate buying like this is bullish or bearish in the long run is anyone’s guess. But it is perseverance that will evidently take more than a few brutal days to dislodge.

For a day, that conviction paid off. Up 3 per cent on Wednesday, the Nasdaq 100 Index scored its best gain since April, bouncing from a correction that took all of three days to complete. Apple Inc. and Tesla Inc., day-trader darlings that bore the brunt of the carnage, showed signs of life, with the electric-car maker jumping more than 10 per cent.

“You’d probably need to see a lot more pain inflicted before you started to see more hesitance on the part of the retail crowd,” said Alec Young, chief investment officer at Tactical Alpha LLC. “There’s been a pattern where buying the dip has been working ever since the Fed stepped in aggressively back in March and April. It’s been such a successful strategy.”

To many Wall Street veterans, a correction to this summers almost 80 per cent surge in the Nasdaq 100 was overdue, with the index’s price-earnings ratio expanding to the highest level since the dot-com era. The long-awaited purge began Thursday, sending the Nasdaq down 11 per cent over three days, the fastest correction from an all-time high it ever recorded.

While the rout came quickly, it did little to flush out the options froth that has been held up as a hallmark of the market’s speculative underpinning. Total call open interest on the exchange-traded fund that tracks the Nasdaq 100, which trades under the ticker QQQ, remains elevated. At 3.6 million contracts, open interest for bullish options on the fund is hovering at the highest since March after the fastest 10-day increase since late 2018, before the Nasdaq 100 plunged more than 20 per cent.

High options volume in popular single-name stocks has persisted, too. On average over the last three trading sessions, more than one million Tesla calls traded a day. That’s 50 per cent above what’s been average over the last 20 days, data compiled by Bloomberg show. Close to 2.5 million Apple calls traded on average each day during the sell-off. That’s roughly double what’s been typical in the last 20 days.

In the broad market, bullish bets are still elevated relative to bearish wagers. The Cboe put-call ratio’s 5-day average hovered near a 20-year low of 0.41 in late August. While the measure has climbed to 0.52, it trailed the historic average of 0.65.

To Matt Maley, chief market strategist at Miller Tabak + Co., there’s still plenty of froth prevalent in the market. For evidence, he points to the huge volume in Apple calls that expire on Friday.

On Wednesday, as shares of Apple jumped, the most actively traded options were call contracts with near-term expiration dates. An Apple call with a $120 strike price, expiring Friday, saw volume exceed 178,000.

“That’s evidence that people did not get scared off by the three-day decline we just saw,” he said. “It’s usually not the first decline that scares investors — especially the less-experienced individual investor. The thing that really scares them is when the first bounce fails.”

Amid sudden turmoil, retailers are standing firm. Small traders’ option flows actually increased last week, according to Options Clearing Corp data compiled by JPMorgan Chase & Co strategists led by Nikolaos Panigirtzoglou. At TD Ameritrade Holding Corp, stocks such as Apple and Microsoft Corp continued to be popular with their clients over the last few days even as they fell, according to JJ Kinahan, the chief market strategist at the brokerage.

Drubbings in Apple and Tesla aside, against a market where the S&P 500 dropped 7 per cent over three days, selling by retail investors appeared to be more muted broadly, going by the performance of their favourite stocks. A basket of shares they’ve been buying, tracked by Goldman Sachs Group Inc, was down only 1.8 per cent during the same stretch.

“Until we get another scary-enough pullback or decline that scares people, they’re going to continue to have this buy-the-dip mentality,” Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter, said by phone. “What we’ve seen the last couple of days is not even close to scary enough.”

Partly lured by commission-free brokerage apps while stuck at home during the pandemic, day traders have flocked to the market, building a presence whose relative heft trails only market makers and independent high-frequency traders. Individual investors now account for roughly 20 per cent of US equity trading, up from 15 per cent historically, according to an analysis by Bloomberg Intelligence.

As violent as this month’s retreat looked, it pales in comparison to the hefty gains accumulated over the past five months. The Nasdaq 100 is up 30 per cent this year, finding support at its 50-day average. Shares of Apple have gained 60 per cent and Tesla is up 338 per cent.

“We saw the fastest -10 per cent in Nasdaq and there wasn’t a huge rush to buy puts,” said Jonathan Krinsky, chief market technician at Bay Crest Partners. “I wouldn’t say it’s froth, but more so complacency.”

Published on September 10, 2020

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