Why the Drop?
TLDR: The stock market dropped hard after Friday’s option expiry. Once spec shorts were wiped out of the way by the mini-short squeeze, the market could resume its natural trend. Down.
When PPI printed hot last week, markets were given sufficient reason to sell - at least if you go by the hyper-sensitivity to inflationary pressures we experienced since 2022.
But fall the markets did not…at least until Monday. Why?
Because of speculators and what we call ‘positioning.’
In the last few weeks a number of hedge funds and individual investors had been entering bearish trades in expectation of a drop in S&P 500 for a variety of reasons.
Some felt the market was high in the range, some noted P/E was an obscene 18x, some believed PPI would bring down the house. Some just want to see the world burn. To each their own.
The issue is that when a lot of people deploy speculative positions in one direction at the same time, they tend to provide support to price action in the opposite direction.
That’s when we say that ‘positioning’ is stretched.
The reason is that speculators have tight stop losses. When a lot of specs are all one-side of the market, the first that begins to cut positions causes an adverse move in price for all others, who begin to cut in turn and…you see where this goes.
So last week the market needed to clear up all the bearish positions, which unsurprisingly congregated on the 3rd Friday expiry. Once those were out of the way, the market begun to price more ‘fundamentally’.
This brings us to another key point, for all short-term traders: watch out for the 3rd Friday of the month.
That’s when major options expire and it can always be a funky time, as it’s where speculative option trades tend to fade out of the market.
What stocks are doing well today?
This section is powered by Open AI connected to TOGGLE AI
At pixel time, the median pre-open performance for S&P 500 stocks is -0.0759%, indicating that 30% of stocks in the SPX index are down pre-open.
Taking a deeper look into the market, stocks that are up show a high number of analyst SELL recommendations (26.0% of all rising stocks) as well as high expectations for earnings growth (20.0%) and a high number of analyst BUY recommendations (19.0%). The top 5 gainers at this time were LMT:NYSE 1.21%, K:NYSE 1.38%, SEDG:NASD 1.46%, EL:NYSE 1.73%, and AMT:NYSE 3.42%.
Conversely, stocks that pre-opened down are characterised by low trading volume (87.0% of all falling stocks), sales that have surprised on the downside (62.0%), and weak earnings growth (45.0%). The top 5 losers were TRGP:NYSE -4.45%, VFC:NYSE -1.45%, WYNN:NASD -1.34%, FTNT:NASD -1.31%, and MRNA:NASD -1.26%.
TOGGLE Leading Indicators: Leading indicators tilt bearish
After yesterday’s drop, we see the first signs of inversion with the Trough indicator flashing bullish:
- TLI: began flashing red two weeks ago now, now it retraced into neutral
- Rangefinder Index: posted another bearish transition last Friday
- Peak Probability Indicator: still not active, nearing the 95% threshold
- Trough Probability Indicator: There comes the first bullish signal
- Candle Breadth: reached the bearish threshold again last week
- Market Phase Shift Indicator: still not active, this is a longer-term indicator
Learn more about the Leading Indicators in the Learn Center!
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