Market Update 3-4-24
Source: The New York Times, 10/26/87

Market Update 3-4-24

I first got involved in the markets in late 1986.? In 1987 the markets were in a strong rally and it was a time of rampant speculation. Alan Greenspan was nominated to become the head of the Federal Reserve in June, 1987, and was confirmed in August, 1987.? Two months later, the market crashed, falling 20% in a single day.

Source: The New York Times, 10/26/87

Why do I bring up this “ancient” history?? Because when I look at today’s market, I see that there are many risks being ignored, just like in 1987. First, we have just experienced the fastest rate hiking cycle in history, yet stocks trade at all-time highs.? Second, the amount of speculation in the markets is now higher than anything I have experienced through decades of market cycles.

In 1987 the options market had a speculative use, but much of the trading volume was part of what was known as portfolio insurance, a hedging mechanism used by portfolio managers to protect the portfolio’s gains.? Today, most of the option volume is speculative in nature.? In 1987 options expired monthly.? Today not only are there monthly expirations, but weekly and DAILY expirations.? Think about that for a minute: you can buy options on a stock as a wager as to how that stock will trade over a 1-day/same day period, called 0DTE options because there are zero days until expiration (i.e. same day).? And the billions of dollars traded daily (notional) isn’t just the retail crowd, but also includes hedge funds and institutional investors.

From the CBOE (Chicago Board Options Exchange) website: “In early 2016, we launched Wednesday-expiring SPX Weeklys…By 2022, Cboe had listed an SPX Weeklys option with an expiration for each day of the week (Monday through Friday) …which resulted in more opportunities for same day trading. What was once a more limited opportunity set is now vast, opening the door for market participants to trade and hedge with the precision of a hand surgeon. In 2023, SPX 0DTE options trading has represented roughly 43% of average daily volume (ADV).”

Looking at the chart below, from the CBOE, we can see that as of September 2023, 43% of the option volume on the SPX (S&P 500) is 0-day options.? And 68% of all the volume are in options that expire in less than 7 days. That is quite the change from 2016 when only 29% of options expired in less than 7 days:


Source: CBOE, 9/2023

?Options have use as a hedging device, but are also heavily used to speculate.? But the leader of all things speculative, Bitcoin, is trading at levels last seen in 2021.

Source: The Kobeissi Letter, X, 3/3/24
Source: Bloomberg, 5 Things You Need to Know, 3/4/24
Source: Seeking Alpha, 3/4/24

Market manias happen all too frequently with people chasing anything that is moving higher, and then when that one stops moving up, pile into something else.? This happened in the Dot-Com bubble and it’s happening again today, this time with artificial intelligence (AI) related stocks.?

According to research compiled by Deutsche Bank, the combined market-cap of the “Magnificent Seven” (AI darlings MSFT, AAPL, NVDA, AMZN, GOOGL, META, and TSLA) now exceeds that of the second largest country stock market in the world (China), and is double the size of the number three market (Japan).


Source: Deutsche Bank, 2/24/24

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Source: Deutsche Bank, 2/24/24

Nvidia now sports a market-cap over $2 trillion and is the third largest company in the U.S. behind Apple and Microsoft.? As of 2/9/24, Nvidia’s market-cap now exceeds that of the entire S&P 500 energy sector, more than double the size of the entire S&P 500 Utilities sector, the S&P Basic Materials sector, and the S&P Real Estate sector:

“Nvidia's market cap is now over $200 billion higher than all of the companies in the S&P 500 Energy sector ... combined. Meanwhile, the total net income of the Energy sector is $147 billion vs. $19 billion for Nvidia.”

Source: Charlie Bilello, X, 2/10/24

Here is a 10-year monthly chart of Nvidia showing its move from $4 to $823:

Source: Stockcharts, 3/4/24

Looking back to the Dot-Com bubble, here is a 10-year monthly chart of Cisco Systems.? For those that don’t remember, Cisco was the darling of the Dot-Com mania because of the use of its networking equipment, much as Nvidia is the darling of AI due to the use of its computer chips:

Source: Stockcharts, 3/4/24

When the Dot-Com bubble burst in early 2000, Cisco’s stock fell 90% from it’s high of $57 to a low of $5.50.

Source: Stockcharts, 3/4/24

As Mark Twain is attributed to saying, history doesn’t always repeat but it does often rhyme.? Since we all know that past performance is no guarantee of future performance, no one knows exactly how things will play out.? But between crypto, the Magnificent 7 and other pockets of market activity, things do look to me to be a bubble, as this data on used-car reseller Carvana highlights:

Source: The Kobeissi Letter, X, 3/3/24


Source: The Economist, 2/4/24

Circling back to the real economy, as opposed to the stock market’s Magnificent 7 and the crypto market, GDPNow from the Atlanta Fed shows GDP dropping:

Source: Atlanta Fed, 3/1/24

And the CASS Freight Index is also telling us a negative story as freight shipments fall:

Source: CIS, 2/28/24

Bottom Line

I realize I sound like a broken record. ?During the past two years we have seen the macroeconomic environment deteriorate while the market's focus has narrowed to a handful of hyper-performing stocks. Things look highly speculative to me as people chase high-flying stocks and various crypto currencies.

There is a tool that has been useful in the past for judging the market sentiment, the SSGA Market Regime Indicator (MRI).? The MRI is scaled between 0 and 100 to form a set of five states to describe the market; crisis, high risk aversion, normal, low risk aversion and euphoria. The five states seem to match well with market behavior and can serve as an early warning system of market extremes.? When the markets are in an extreme state of either crisis or euphoria, there tends to be higher volatility and a chance for reversal since extremes cannot last.? We are currently in a state of euphoria which is unlikely to continue, but since there is no crystal ball to predict the future, we will just have to see how things play out.?


Source: State Street Global, 1/30/24

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Please do not hesitate to ask questions or comment.


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