Mike Santoli’s market notes: Breaking down the tech shakeout, 'skimming away of the silliness'

Published Fri, Sep 4 20201:14 PM EDT

(This story is for CNBC Pro subscribers only.) This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. This is how an overshoot usually goes. Still flushing out the hot money, getting some pent-up selling done. Reversing most of the past four week's levitation, testing a still-intact longer-term uptrend. Pretty healthy so far. Lot of focus on 3300 or so on the S & P 500 (down another 1.5-2% from here) as possible place for this to settle out, roughly going back to where the rally accelerated in a speculative push. As noted a few times, after first running to a new high the market often backslides to test that breakout level. We also got to a +10% YTD level on S & P 500 and Nasdaq 12,000, reasonable places to say "let me take some off ahead of seasonally weak September." The S & P is up off the lows and how hovering right around those old record highs in the 3380s. And Tesla, where this all started, is flat to green. Compared it to the January 2018 vertical correction, also from similarly overbought "melt-up" conditions. Very different macro backdrop (yields then rising, Fed tightening, late-cycle overheat concerns) but similar market trajectory and rhythms. That drop also had a cover story of "derivatives stuff gone haywire" – the volatility-selling blowup then, call-options binge and purge now. Crucially, in both cases (so far) the market stumble was not really connected to newly emergent economic concerns. I should note nothing says we need to fall much more or spend a ton of time going nowhere as happened in 2018. This really does seem like a "skimming away of the silliness" moment. This chart from Strategas shows yesterday's dump took from stocks in proportion to how much they were already up. Reports that Softbank has been a huge driver of the tech call-option frenzy are hilarious and typical, though this doesn't much change the takeaway from the recent speculative pile-on in tech. We knew there was voracious, indiscriminate demand for calls acting as an accelerant in both directions. And there has been a surge in very small options orders in all this, which means it's also retail money playing. Does Softbank's participation mean it can keep gunning this part of the market given its deep pockets? Or has this little shakeout put the game on hold? Jobs report net positive . Very strong household survey knocks unemployment rate near 8%, though also with an uptick in "permanently unemployed." Setup is for a bit more rapid pickup of laid-off workers, then maybe a slow early 2010s-style grinding labor market improvement? Strength in junk retail and consumer-finance stocks today suggest the market acknowledging better near-term household conditions. Treasuries selling off on the better jobs number, and credit trading pretty firm. Again, argues against the equity-market wobble as being mainly a macro affair. Breadth is negative but again outperforming the indexes. NYSE volume only 65% in downside stocks. Equal-weight S & P only down 0.8%. This is a rebalancing of the market, mega-cap growth surrendering a lot more recent upside than the rest of the market. VIX receding a bit, in part because it was quite inflated, in part the market is off the lows, in part because we have three days of no trading, which means no price movements, which means index-option prices within the VIX need to bleed lower to account for that.

The New York Stock Exchange (NYSE) stands in lower Manhattan on the first day that traders are allowed back onto the historic floor of the exchange on May 26, 2020 in New York City.

Spencer Platt | Getty Images

(This story is for CNBC Pro subscribers only.)

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics.

This is how an overshoot usually goes. Still flushing out the hot money, getting some pent-up selling done. Reversing most of the past four week's levitation, testing a still-intact longer-term uptrend. Pretty healthy so far.
Lot of focus on 3300 or so on the S&P 500 (down another 1.5-2% from here) as possible place for this to settle out, roughly going back to where the rally accelerated in a speculative push.
As noted a few times, after first running to a new high the market often backslides to test that breakout level. We also got to a +10% YTD level on S&P 500 and Nasdaq 12,000, reasonable places to say "let me take some off ahead of seasonally weak September." The S&P is up off the lows and how hovering right around those old record highs in the 3380s. And Tesla, where this all started, is flat to green.
Compared it to the January 2018 vertical correction, also from similarly overbought "melt-up" conditions. Very different macro backdrop (yields then rising, Fed tightening, late-cycle overheat concerns) but similar market trajectory and rhythms. That drop also had a cover story of "derivatives stuff gone haywire" – the volatility-selling blowup then, call-options binge and purge now. Crucially, in both cases (so far) the market stumble was not really connected to newly emergent economic concerns.
I should note nothing says we need to fall much more or spend a ton of time going nowhere as happened in 2018. This really does seem like a "skimming away of the silliness" moment. This chart from Strategas shows yesterday's dump took from stocks in proportion to how much they were already up.

Reports that Softbank has been a huge driver of the tech call-option frenzy are hilarious and typical, though this doesn't much change the takeaway from the recent speculative pile-on in tech. We knew there was voracious, indiscriminate demand for calls acting as an accelerant in both directions. And there has been a surge in very small options orders in all this, which means it's also retail money playing. Does Softbank's participation mean it can keep gunning this part of the market given its deep pockets? Or has this little shakeout put the game on hold?
Jobs report net positive. Very strong household survey knocks unemployment rate near 8%, though also with an uptick in "permanently unemployed." Setup is for a bit more rapid pickup of laid-off workers, then maybe a slow early 2010s-style grinding labor market improvement? Strength in junk retail and consumer-finance stocks today suggest the market acknowledging better near-term household conditions.
Treasuries selling off on the better jobs number, and credit trading pretty firm. Again, argues against the equity-market wobble as being mainly a macro affair.
Breadth is negative but again outperforming the indexes. NYSE volume only 65% in downside stocks. Equal-weight S&P only down 0.8%. This is a rebalancing of the market, mega-cap growth surrendering a lot more recent upside than the rest of the market.
VIX receding a bit, in part because it was quite inflated, in part the market is off the lows, in part because we have three days of no trading, which means no price movements, which means index-option prices within the VIX need to bleed lower to account for that.