(Bloomberg) — The massive expiration of options on Wall Street not only made stock traders more cautious, it also sent one of the bull market’s leaders on a roller coaster ride. Volume soared as markets closed.
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An estimated $5.5 trillion expired in the quarterly event ominously known as “triple witching” in which derivative contracts linked to stocks, index options and futures expire. Nearly 18 billion shares changed hands on Friday on American stock exchanges. This is more than 55% above the three-month average.
This time, Nvidia Corp. played an additional role. The value of contracts tied to the chipmaker expiring Friday was the second largest of all underlying assets, behind the S&P 500. And the expiration coincided with the index’s rebalancing by the S&P Dow Jones Indices .
For Interactive Brokers’ Steve Sosnick, the “key” rebalancing was expected to occur in the Technology Select Sector Index, which is the benchmark for the roughly $80 billion XLK exchange-traded fund.
“The weighting of the Nvidia index will increase significantly, mainly to the detriment of that of Apple,” he noted. “Given the outsized importance of mega-cap tech in general – and Nvidia in particular – to broad market indices, it is not unreasonable for traders to be wary of outsized moves late in the day.”
As contracts disappear, investors adjust their positions, adding a burst of volume capable of swinging individual holdings. The S&P 500 fell slightly to around 5,465. Nvidia almost erased a drop of around 5% before heading back down. It wiped out more than $220 billion in two days. Apple Inc. also fell.
Yields on the 10-year Treasury were little changed at 4.25%. France’s risk premium relative to Germany closed at its highest since 2012.
The artificial intelligence frenzy that briefly made Nvidia this week the world’s most valuable company has also driven record inflows into technology funds, Bank of America Corp. strategists said.
About $8.7 billion was invested in technology funds in the week to June 19, according to a bank note citing EPFR Global data.
“The ‘all roads lead to Nvidia’ trade is once again reinforced” as Europe reels amid political unrest in France, said strategist Michael Hartnett. Yet even though investors believe they still need more exposure to AI-related games, “all asset allocators are concerned about stock concentration risk.”
Keith Lerner of Truist Advisory Services says the firm is downgrading the technology sector to “neutral” after the industry significantly outperformed the S&P 500 since calling it “overweight” in November.
“While we still have a favorable long-term view of the technology, in the short term the sector appears extensive and we will not pursue the sector,” Lerner noted. “That said, the sector appears far from ‘bubble’ territory, and we believe long-term tailwinds will persist around artificial intelligence.”
Friday’s options event came at a critical time for positioning markets for the second half of 2024 and the Federal Reserve’s next steps. Data showed that U.S. services activity recovered earlier this month at the fastest pace in more than two years. Furthermore, sales of existing homes fell for a third consecutive month.
“Investors should prepare for drama,” said Solita Marcelli of UBS Global Wealth Management. “The second half of 2024 promises to be a period of transition and volatility. The decisions investors make today will be key to effectively navigating this period.
Oppenheimer Asset Management’s John Stoltzfus says he remains positive about the outlook for stocks as prospects for improving fundamentals this year show potential to come to fruition.
“That said, history shows us that the prices of stocks and other asset classes do not rise in a straight line, but rather tend to climb the proverbial ‘wall of worry,’ which requires diversification prudence, patience and a sense of risk tolerance. and fluctuation for private investors and discipline linked to the mandate of an institution for professional investors,” he noted.
Company strengths:
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Apple Inc. is denying a raft of new technologies to hundreds of millions of consumers in the European Union, citing concerns posed by the bloc’s regulatory attempts to rein in big tech.
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AMC Entertainment Holdings Inc. is holding confidential discussions with some of its lenders about reducing its debt load and extending near-term maturities, according to people with knowledge of the matter.
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Airbus SE is moving closer to a deal with Spirit AeroSystems Holdings Inc. to take over part of the aerospace supplier’s business, paving the way for an acquisition of most of the company by main rival Boeing Co. as early as next week.
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American Airlines Group Inc. is suspending training for new pilots until the end of this year, the latest pullback by a major U.S. carrier in the face of uneven travel demand and plane delays.
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A top U.S. Food and Drug Administration official overrode reviewers and gave broad approval to Sarepta Therapeutics Inc.’s gene therapy for a rare muscle disease in children, despite a lack of data showing it actually slows the overall progression of the disease.
Some of the main market movements:
Actions
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The S&P 500 fell 0.2% as of 4 p.m. New York time
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The Nasdaq 100 fell 0.3%
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The Dow Jones Industrial Average was little changed
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The MSCI World index fell 0.3%
Currencies
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Bloomberg Dollar Spot Index little changed
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The euro was little changed at $1.0692
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Sterling was little changed at $1.2649.
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The Japanese yen fell 0.4% to 159.58 per dollar
Cryptocurrencies
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Bitcoin fell 1.2% to $64,301.01
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Ether rose 0.4% to $3,538.53
Obligations
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The yield on 10-year Treasury bonds was little changed at 4.25%
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The German 10-year yield fell two basis points to 2.41%
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The UK 10-year yield rose three basis points to 4.08%
Raw materials
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West Texas Intermediate crude fell 0.8% to $80.63 a barrel
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Spot gold fell 1.6% to $2,322.32 an ounce
This story was produced with the help of Bloomberg Automation.
–With help from Carly Wanna, Sagarika Jaisinghani, Cecile Gutscher, Divya Patil, Matthew Burgess and Winnie Hsu.
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