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Reality Strikes Again

This is the end of day market report for February 8th, 2024.

Today was the lowest volatility day of 2024. The lowest vol since Christmas. Before that, the day before Thanksgiving. As we see in the chart, Thanksgiving's ebb in volatility was the only time collapsed vol did not precede a market rollover.

As I showed on Twitter, every time Taiwan Semiconductor goes parabolic, the Tech rally implodes soon after. This company is the largest semiconductor manufacturer in the world, with 60% market share, so it's larger than all other contract manufacturers combined. Which puts it at the epicenter of every Tech bubble. However, we just learned that TSM revenue grew a paltry 8% year over year. The semiconductor sector is contending with a slowdown in smartphone sales combined with a trade war in semiconductors between the U.S. and China which will also affect AI sales. In addition, both presidential contenders have China trade war at the center of their campaign strategy so they will be competing for who can put the most constraints on global semiconductor trade.

Unfortunately, we've been lied to too many times before by Wall Street. Instead of being at the beginning of a new AI bubble, this is most likely the END of the AI bubble. It will suffer the same fate as the last two major pump and dumps over the past three years.

Which gets us to weaponized financial AI:

Imploding market volatility is what market algos do to force options to expire worthless which increases the income of those who are on the sell side of the option trade.

In the chart below we see that since 2020, total option volume has exploded due to financial "innovations" such as 0 date options which expire each day approaching the timeframe of a Blackjack table, and the expanded popularity of weekly options. So it can come as no surprise that many investors are now using option writing strategies to generate income versus hedging:

This article from December 2023 summarizes the option writing craze:

"Investors on the hunt for regular income have this year poured almost $26bn into exchange traded funds that sell options tied to stocks, inspiring a wave of copycats and raising questions about their effects on market volatility"

"The ETFs have grown so large that some analysts believe they are beginning to influence wider financial markets by dampening the widely followed Cboe Volatility Index, or Vix"

FR: The thing to remember about volatility is that it's mean reverting. Periods of low vol give way to periods of high vol. So you have to be slightly curious as to what happens this time when volatility expands.

My guess is that we're going to find that a lot of artificial intelligence has accumulated in these financial markets. And no one really knew what would be the consequence if the world ever went RISK OFF again.

Fittingly, the top performing "sector" in 2024 so far ~30 trading days in, is not semiconductor stocks.

It's pot stocks. Which have doubled since November. But it appears that this AI rally is ending as well:

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