What happened to the Santa Claus Rally?
The S&P 500 index was going along nicely. It was up 14% since the end of November, supported by an increasingly dovish Federal Reserve. And then, on Wednesday, it proceeded to sink 1.4%.
While the index was up by 0.6% in early trade on Thursday, nervous investors were still scratching their heads, wondering what happened.
There didn’t appear to be any underlying reasons. Economic data — not bad; bond yields — 10-year still below 4%; geopolitics — still tense, but no major escalations.
The Kobeissi Letter summed up the market action: “The S&P 500 just erased the last five days of upside in less than two hours. It also just ended a 10-day win streak just as sentiment reached Extreme Greed levels. Markets take the stairs up but elevator down.”
See Also: We’re In For A Santa Claus Rally Alright — But It Might Be Subpar; Here Are 5 Reasons Why
Derivatives Drama
Some pointed the finger at trading in zero-day options (0DTE). This dark corner of the derivatives market saw hefty put options trading. Market makers on the other side of the contract had to hedge their exposure by selling stocks.
“It felt strange considering what the markets have been like over the past two months,” said C.C. Lagator of Options AI, speaking Monday on Benzinga‘s “PreMarket Prep” program.
“The fact that the market’s up this morning lends even more credence to the theory that it might have been a one-day 0DTE event because they’ve expired, they’re gone.”
Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald, said: “Today we saw a late-day sell-off that, we believe, could have been caused by, or certainly exacerbated by, 0DTE SPX options. Certainly the market environment was ripe for it.”
By “being ripe for it,” he was referring to the S&P 500 being in overbought territory, where stock valuations begin to get stretched.
Such moves are not uncommon at this time of year. Trading volumes are low as much of the institutional portfolio adjustments have been done already. Traders are looking for an early getaway for the holidays.
Much of the weight of the sell-off was in the so-called Magnificent Seven (Mag7) stocks. Those companies include Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL).
Shares that have been on a remarkable rally…
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