S&P 500 Halts Winning Run With Big Options Test: Markets Wrap

A seemingly unstoppable stock rally fueled by Wall Street’s obsession over anything related to artificial intelligence faltered on Friday, with the market facing the test of a massive options expiration.

(Bloomberg) — A seemingly unstoppable stock rally fueled by Wall Street’s obsession over anything related to artificial intelligence faltered on Friday, with the market facing the test of a massive options expiration.

Traders also took some chips off the table ahead of Monday’s US holiday. The Nasdaq 100 underperformed, led by losses in giants like Microsoft Corp. and Apple Inc. — which had recently closed at all-time highs. A worrisome warning from Micron Technology Inc. weighed on chipmakers, while Adobe Inc. climbed on a bullish forecast. The S&P 500 halted a six-day winning streak, but still notched its best week since March.

Stock traders caught between the fear of missing out on this year’s rally and mounting concerns about an overbought market had something else to cope with this week: positioning. 

With an estimated $4.2 trillion in options contracts tied to stocks and indexes scheduled to mature, traders would typically need to either roll over existing positions or start new ones. The impact of derivatives on trading this week was so significant that, at one point, the market’s favorite volatility gauge was climbing alongside the S&P 500.

The so-called VIX finally gave in, and with Friday’s plunge, it ended up erasing this week’s advance.

“The market could see some wild swings in either direction for no fundamental (or even technical) reason at all,” on a day like today, wrote Matt Maley, chief market strategist Miller Tabak + Co. “So nobody should read anything into today’s movement.”

Inflation, Putin, Fed

Indeed, the market seemed to have ignored to a certain extent some developments that would otherwise be considered catalysts for trading.

That was the case with data showing a slump in consumer year-ahead inflation expectations and the latest geopolitical news. President Vladimir Putin said Russia has delivered its first tactical nuclear weapons to Belarus, three months after announcing the plan that threatens to ratchet up tensions with the US and its allies over the war in Ukraine.

Not even hawkish Fedspeak had much of an impact or any impact at all on trading.

“The market caught a renewed bid from traders suffering from FOMO and ‘chasing’ the market higher,” said Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter. “We are not bearish stocks right now, but we are growing cautious on the very near-term direction of the market given how quickly the market priced in a very Goldilocks macroeconomic environment based on only limited evidence of improvement in the current major market influences.”

The rally in US stocks is about to run out of steam, according to Citigroup Inc.

Strategists at the bank led by Scott Chronert this week reiterated their call for the S&P 500 to drop to 4,000 by year-end, and initiated a new target of 4,400 by mid-2024, or just below Friday’s 4,410 close. 

Bank of America Corp.’s Michael Hartnett said Friday he’s not convinced this is the start of a “brand, new shiny bull market.” The current market looks more like 2000 or 2008, with a “big rally before big collapse,” Hartnett wrote.

Equities had about $22 billion inflows in the week through June 14, while bonds had $6.7 billion of additions, BofA said in a note, citing EPFR Global data.

In other corporate news, iRobot Corp. soared after Amazon.com Inc.’s proposed $1.7 billion deal to buy the robot vacuum firm was given the all-clear by the UK’s antitrust agency. Virgin Galactic Holdings Inc., Richard Branson’s space-tourism venture, surged after announcing that its long-awaited first commercial passenger mission will take off as soon as June 27.

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 0.4% as of 4 p.m. New York time
  • The Nasdaq 100 fell 0.7%
  • The Dow Jones Industrial Average fell 0.3%
  • The MSCI World index was little changed

Currencies

  • The Bloomberg Dollar Spot Index rose 0.1%
  • The euro was little changed at $1.0936
  • The British pound rose 0.3% to $1.2822
  • The Japanese yen fell 1.1% to 141.84 per dollar

Cryptocurrencies

  • Bitcoin rose 3.3% to $26,393.75
  • Ether rose 3.2% to $1,721.52

Bonds

  • The yield on 10-year Treasuries advanced five basis points to 3.76%
  • Germany’s 10-year yield declined three basis points to 2.47%
  • Britain’s 10-year yield advanced three basis points to 4.41%

Commodities

  • West Texas Intermediate crude rose 1.5% to $71.66 a barrel
  • Gold futures fell 0.1% to $1,968.50 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Vildana Hajric and Isabelle Lee.

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