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Reversal Of Fortune

Any questions?

"The reversal in Nvidia shares comes ahead of Friday’s “triple witching” options expiration for June, expected to be the biggest ever. Nvidia options are among the most popular contracts heading into the expiration.

Adding another wrinkle to what’s expected to be a busy session on Friday, the popular Technology Select Sector SPDR ETF is due for a rebalance that could see it buy roughly $10 billion worth of Nvidia shares while dumping $11 billion of Apple Inc. stock, according to estimates shared with MarketWatch last week by analysts at Bloomberg Intelligence."

So, to sum up this week - early in the week Nvidia sees a record spike in call option volume and gets a massive weigting increase in the Tech Sector ETF, but on Thursday the stock implodes. I call that a key reversal of fortune. The trillion dollar question will be what happens next week when manic call option buying AND buying for the XLK no longer supports the stock. Basic logic dictates it could make Thursday seem like a good time.

The even greater irony of Thursday's reversal is that it came amid a new all time record high in call option volume which we see in the chart below. Recall that the record last Friday was 9 million call options. Yesterday traded over 12.5 million. In my last post I described the dynamics of a "Gamma squeeze" causing stocks to go higher. However, there are several factors that determine the success of a Gamma squeeze, and one of the key factors is time to expiration. If the time to expiration is too short aka. one day, then the squeeze fails. Also, if the primary strike price is too close or in the money, then the squeeze runs out of ammo because market makers only keep buying the stock until it reaches the strike price. When delta reaches 1:1 they are fully hedged.

But it's not just Nvidia's rally that is at stake now. This entire RISK ON rally is now at risk of mass explosion. One thing today's pundits don't do well is to make the correlation between related asset classes. For example, here we see Bitcoins imploding along with semiconductors. Is that a coincidence? Of course not. Anyone can see from this chart, that they are consistently highly correlated over time.

Another chart I showed recently on Twitter is this one below indicating that the overall Tech sector is the most overbought since August 2020 at the height of the pandemic stock market frenzy. As we see, after that melt-up ended, volatility exploded. It would make perfect sense that the Tech Sector is now peaking with the increased weighting accorded to Nvidia in the XLK ETF.

An article I posted mid-week compared this Nvidia rapture with the Tesla supernova that took place in November 2021. Back in 2021, Tesla consistently dominated both Nasdaq dollar volume AND call option volume similar to the way Nvidia dominates now. Of course the magnitude of this event is plainly evident by the fact that Nvidia market cap is almost 3x higher than Tesla's three years ago.

Of course when Tesla imploded, Bitcoins imploded and the entire Nasdaq rolled over.

Why do people forget these things? Is it amnesia or dementia? Or greed?

In summary, let's say we are witnessing the beginning implosion of the global asset super bubble.

Who would tell you?

Sadly, in an Artificial Intelligence bubble there is no strength in numbers.

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