Tech Rally Following MSFT Earnings

Welcome back to market on close. I'm Marley Kayden. Joining me now in our Chicago headquarters is Kevin Davitt, head of index options content over at Nasdaq. Kevin great to have you back in studio with me. You mentioned right when you sat down I was smiling. Was it because we have a Green Day on the board? Yes, certainly. That doesn't hurt. And it's really nice to see the Nasdaq have this nice 2% pop with Microsoft and some of these chip names recovering. But we have seen one of the sharpest pullbacks that we've seen in recent weeks. We came off record highs I think last we talked. And since then we've got a very different setup. So what has changed in the overall character narrative of the market and what is driving the increase in volatility. I think we closed above 20 yesterday on the VIX. You are right on all counts. Maybe we can reset the foundation here with this interview. But I think the point you made is it can be broadly applied. So we have seen volatility in both directions this year. And you and I have talked about this in the past. That volatility is a nondirectional measure. It's not typically absorbed that way. This is the type of volatility that most most investors associate with. But I have a look at monthly returns in the Nasdaq 100 and ranges. If we could pull that up, I think it would it would explain a lot. The long story short is that we have seen larger than average swings three out of the past four months. So if we focus on the right hand side and the bottom of this visual, what you'll see is that April was the biggest up month that the NHD has shown since the rebound from Covid, followed by a nearly 11% gain, a relatively quiet June. And as of yesterday in Ndex, that's down 11% month to date. It's going to be less than that right now. But the point here is that we have seen or maybe the point, some interesting inflection points at the end of months. So March 30th was a pivot point giant April that continued into May. Time will tell whether we see more of that upside volatility in August. And the market sort of digests this. But I would contend that this is relatively normal. Volatility tends to cluster and it moves and can help and hurt in similar degrees. So when you're looking at these larger than average swings and and some of the volatility at the ends of the month as we are on July 30th. Now, as you look at it and the underlying causes, are you looking at it perhaps as just the market digesting this higher rate environment that we are appearing to be in? I think yesterday we pretty much took the idea of a cut off the table. A hike is still very much on the table and higher earnings. Or does this feel or appear from the trends in the data that you're seeing, fundamentally different than the volatility that we've seen earlier this year? I like that framing, and I'm going to focus on your rates point. My belief is that with respect to equity markets, the Nasdaq 100 tends to lead. You see that in both directions. So over long time frames ND tends to outperform the SPX. On the upside, it captures 145% of the upside and about 125% of the downside. Those sort of pivot points throughout time and this year have in many situations been tied to what's going on in the bond market. And there's a reason that people point to the fixed income market as smart money. I think, those sort of denotations are shifting because the influence that retail and how well they have done over the past handful of years changes, but to, to hopefully sort of get to your point of, is this this different this time? No, the upside move earlier this year was an earnings story. This, this has been sort of a normalization and a question of when is this expenditure going to be monetized. And this is how markets work. Right. They tend to move a little bit too far in both directions. We'll see if things stabilize. And that macro volatility comes in a bit in in August. And you mentioned there the Nasdaq tends to lead. And so I want to talk about the leaders in the Nasdaq because you also mentioned sort of the pendulum swinging concept that we tend to overcorrect. We have the leaders now being the laggards in many ways. We've seen these AI and these semi names under consistent pressure that has put the market now under some pressure. Not today though. While we're seeing a rotation into these software names, which got monikers like Sass and Sass Pocalypse just earlier this year, as you look at it and you look at the data and you look at the trend, is this a healthy rotation or is this a complete rethinking of the AI narrative and investors fundamentally questioning that trade? I think it continues to be the trend that has kind of defined the markets for a couple of years now. I might put that inflection point at the end of 2022, when the AI, the broader AI trade, became a thing. We have seen stretches like this, and you're seeing the flip side today, but I have a visual of ND constituent performance. Looking back a month that I think is illustrative in terms of a narrow focus and a broader focus. If we could share that, it'd be great. Okay, so the short story here is that you see dispersion and for the last month, what you have seen is that those names that you that you alluded to, those SaaS names that really, really underperformed earlier this year have been the outperformers and kind of that, that parable type of way over the past month. And on the downside, you see names like SanDisk and micron and ARM, I believe, which you and Jenny were just talking about, which had really outperformed. This continues to be the trend. I would not expect that to really change. And I think it's a great example of how tech is not a monolith. There's a whole lot of of gradients within that broader umbrella. And I think this is an example of that. And, and, you know, today is an example of how that can flip back and that tone can change whether it continues. Time will tell. And let's talk options here for a second too, because you highlighted over in the notes you sent today that markets tend to fall faster than they rise. And so as you look at options action in the markets, obviously price downside protection differently. What are the options traders telling you right now that perhaps stock investors are overlooking? Good question. You know that I love or look at things through the lens of options first. And that's not necessarily the case for for many sort of long term passive investors. But the options market in particular, the index options market is so rich with information. And that's the case for single stocks too, right? You're thinking about Apple or Amazon earnings tonight. Now what is the option market or what was it telling me last night when I was thinking of our conversation. The skew in NEX last night looking at one month options, which is fairly standard, looked very similar to what the market was pricing in late March of, of this year when markets bottomed, it wasn't quite the same. The upside is priced a little bit higher, and the put skew was a little bit more pronounced earlier this year. Oh that's great. Right on cue. So that's telling me that there has been significant demand for downside under understandable. Now how this thing shifts today and over the course of the next week as, as earnings sort of come in and the market digests that I think will be really interesting. The other point that I would make is that we've had six consecutive down days for ND, and that is a relatively coming into, as of yesterday's close six consecutive down days, relatively unusual. There are only four of them looking back over the past ten years. So a move like today where I'm looking at the Nasdaq 100 futures up over 3% rebounds like that. Again, not unusual after the type of drawdown we've seen. But the question becomes how do we look a week from now and a month from now. And I think the options can give you some indication of when the market sort of clamors for UPS, if and when the market starts clamoring for upside. I was looking at the options market in advance of Amazon and Apple, and it looks like sentiment leading bullish on Amazon. But just since Wednesday we've seen a little bit of a pivot in terms of sentiment for Apple. So it will be interesting to see how that plays out after the market today. When we close this today when we get those earnings. But Kevin really appreciate you being with us to take a closer