Zero-day-options, weak technicals and China: Breaking down the market’s August headwinds

Published Thu, Aug 17 202312:31 PM EDT

A few signs of market trouble are starting to emerge, making some on the Street feel a tad uneasy. The S & P 500 is down 4% in August. That puts it on pace for its worst one-month decline since December — when it dropped 5.9%. It would also be the index's first monthly loss since February. And while this is typically a weak time of the year for stocks — August is only the ninth-best month for the S & P 500 going back 10 years, and September is the worst one — there are other trends contributing to the slump. Here's a breakdown of what's moving the market: Zero-days-to-expiration options Goldman Sachs' Scott Rubner pointed to zero-days-to-expiration options as a source of recent market weakness. These are options with a fleeting shelf life, expiring the same day they are traded. Interest in them has exploded this year as retail traders use them basically as a form of gambling on short-term movements in the market. It was cited as a tailwind to the market in frothy times but now it may be having the opposite effect, worsening sell-offs. In a note Wednesday, Rubner said 0DTE volume has reached an all-time high. He also pointed out a move seen Tuesday that raised concern for him. He noted the volume of 0DTE put options on the 4,400 strike price spiked around 3:20 p.m. ET, driving the options cost all the way up to $9 from 70 cents by 3:40 p.m. ET. Overall, 99,000 contracts were traded in that time — representing a notional value of $45 billion. Rubner said this contributed to a sudden move down in the market that day. "There is not enough liquidity on the screens to handle market [makers] delta hedging such a dramatic move over a short 20 minute period," Rubner wrote. Technicals Stocks are also running into technical pressure. Wolfe Research strategist Rob Ginsberg wrote Wednesday a worrying trend was taking place: Stocks are losing momentum while in overbought conditions. He noted the Nasdaq-100 's moving average convergence/divergence (MACD), a momentum indicator used by chart analysts, recently triggered a sell signal. It's the first time since last September, "but more importantly to us, it's [its] first within a deeply overbought condition since early last year," Ginsberg wrote. "The S & P is not quite there, but we would be very surprised if it doesn't follow the NDX's lead." Meanwhile, the S & P 500 on Tuesday closed below its 50-day moving average for the first time since March, indicating the potential for more downside pressure. China Recent data out of China has been less than stellar. Earlier this week, the country reported retail sales grew by 2.5% in July from the year-earlier period . That was well below a Reuters forecast of 4.5%. Industrial production also increased less than expected last month. China also surprised investors with a central bank rate cut. On top of that, some are worried that another real estate crisis in China may be brewing. "It's been almost two years since China Evergrande Group, once China's largest real estate developer, shocked the financial markets by defaulting on $340 billion in debt. Since then, the Chinese real estate market has been in a serious slump," wrote Ed Yardeni of Yardeni Research. "Real estate prices are falling, most recently by 0.2% m/m in July. Investment in real estate fell 8.5% y/y during the first seven months of this year." "The country needs a good U.S.-style restructuring of its real estate market, where apartment prices are slashed, debt is restructured, and new equity investors are brought in as grave-dancers," he added. "Until then, we're left watching the wreckage unfold." This is all stoking concern over the health of the global economy, especially as the U.S. tries to avoid a recession. What to do? For investors looking to protect their portfolios, there are some stocks that can help. Last week, investor Sarat Sethi highlighted Freeport-McMoRan, Haleon and Johnson & Johnson as attractive stocks that are also on the safer side. "Those are areas that — with rates where they are, and a potential slowdown but demand-supply exceeding — you want to be in. Areas where you have pricing power and solid balance sheets," Sethi, managing partner at DCLA, told CNBC's "Squawk Box." JPMorgan on Thursday also highlighted eye care giant Alcon as a stock that can deliver consistent growth going forward. The bank upgraded shares to overweight from neutral and raised its price target to $89.30 — implying upside of 11% . — CNBC's Michael Bloom contributed reporting.