You may feel like the little guys, but you can still analyse the market better than the institutions if you know what to look for and look past the bullshit market narratives they feed you. All that matters is the data. With that in mind, here's my thoughts on Friday's sell off.
Firstly, this sell off was mostly OPEX related. This was compounded by the Covid news and some weak stagflationary data earlier in the day. The weak stagflationary data was the least impact. The most impact was OPEX, for sure.
This is because Goldman estimated that estimates $2.6 TRILLION of notional open interest across equities rolled off:
$1.6tn of indices
$433bn of ETFs
$496bn of single stock options
That naturally produced selling pressure, which was compounded by the COVID news.
The covid news is almost entirely fake. This kind of market manipulation is extremely common in this industry, and they chose to conveniently bring this up on OPEX when there was already heavy selling pressure, citing in part papers that have been out since 2018.
Institutions commonly do this in order to create VIX spikes, which they then short.
If we look at this chart, we can see that despite the heavy selling day in QQQ on Friday, institutional ownership jumped to a new high. This means to say that institutions were buying that dip whilst retail was all freaking out. This is a first tell.
Note I got this chart from X.
It is likely that the institutions were buying QQQ as NVDA earnings next week are expected to come good amid mixed expectations, which should lead to a rally in Nasdaq. IT seems institutions were using Friday’s sell off as an opportunity to go long.
Now we must mention that potentially the biggest tells for market impact going forward came in the last hour.
IN the last hour, VIX rejected from a key level just below 18.5. That was a pivot level, and the fact it actually came down from there at a time when selling pressure was increasing is a positive sign. This means that the correlation between SPX and VIX became positive again in that they started moving in the same direction, which is again a positive sign. We also closed just above the 50d EMA on SPY which is also a positive sign
Secondly, we saw a bunch of put selling in SPY at the end ofnd of the day shown here.
Most of this put selling was traders selling puts for next week, ranging from 600 to 606. So they are betting on an increase higher.
This aligns with the fact that institutions were buying the dip on QQQ on Friday.
For the more technical among you, It looked like traders were essentially shorting the skew. What this means is they were selling options with higher implied volatility e.g. OTM puts in equities (as we see above), and buying options with lower implied volatility (e.g. OTM calls). This trade profits when we get a decrease in implied volatility. So this is another sign that institutional traders are maybe anticipating that volatility gets faded here.
Then we also have the important fact that of realised volatility. I told you all about realised volatility and its importance last week.
What we ntoed is that realsied volatility did increase on Friday’s sell off, of course, BUT it only increased by around 1.6%. That on a big sell off of over 1.7% in SPX.
That is not much of an increase in realised volatility.
For example, to put that into context, on October 30, we got a drop in SPX similar to Friday, but on that day, realised volatility increased by over 2.5%. So the increase in realised volatility was not that much. A positive sign.
Now what we were discussing is that there are a few other effects at work here.
The first is an under appreciated statistic which we can see come to fruition tomorrow.
This is the fact that when SPX drops by 1.5% or more on a Friday, 90 out of 94 times that this has occurred in history, those Friday lows are taken out on Monday.
This suggests that we can see further downside at first on Monday.
Furthermore we have a seasonal impact at work here. This is the fact that the 2nd half of February is the worst 2 week period of the year.
However, typically we see a recovery in March as H1 of March is one of the better performing 2 week periods of the year.
So we do have to be cautious of these seasonal impacts, but the signs are there that the market dump on Friday was more the result of market manipulation that institutions want to capitalise form, rather than a genuine problem.
Next week we have the positive catalysts of a potential ceasefire as Trump says Russia Ukraine peace deal can come as early as this week, as well as more importantly, the NVDA earnings. Expectations for NVDA are mixed, but they are likely to deliver very strong results, so they are hopefully going to smash through lower expectations than they are typically used to.
As mentioned, these are initial thoughts. Will be able to say more after seeing futures action and the opening on Monday.
Note these are personal thoughts and are not intended to constitute financial advice.
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