(Bloomberg) — Mass options expiration on Wall Street has not only made investors more cautious but also sent one of the bull market leaders on a rollercoaster ride. Volume spiked at the close of trading.
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An estimated $5.5 billion expired during the quarterly event ominously known as “triple witchcraft,” in which derivative contracts linked to stocks, index options and futures expire. Nearly 18 billion shares changed hands on U.S. exchanges on Friday. 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 on Friday was the second-highest of any underlying asset, behind only the S&P 500. And the expiration coincided with the rebalancing of the index by the S&P Dow Jones Indexes.
For Steve Sosnick of Interactive Brokers, the “key” rebalancing was set to occur in the Technology Select Sector Index – which is the benchmark for the roughly $80 billion XLK exchange-traded fund.
“Nvidia’s index weight will increase dramatically, largely at the expense of Apple’s,” he noted. “Considering the outsized importance of mega-cap technology in general – and Nvidia in particular – in broad market indexes, it is not unreasonable for traders to be wary of outsized moves later in the day.”
As contracts disappear, investors adjust their positions, adding a burst of volume that can cause individual holdings to fluctuate. The S&P 500 fell to around 5,465. Nvidia nearly erased a drop of about 5% before heading lower again. It erased more than $220 billion in value in two days. Apple Inc. also fell.
10-year Treasury yields were little changed at 4.25%. France’s risk premium over Germany closed at the highest level since 2012.
The artificial intelligence frenzy that made Nvidia the world’s most valuable company this week also generated record flows into technology funds, strategists at Bank of America Corp. said.
About $8.7 billion flowed into technology funds in the week to June 19, according to a bank note citing data from EPFR Global.
“The ‘all roads lead to Nvidia’ trade is once again strengthened” as Europe falters amid political turmoil in France, said strategist Michael Hartnett. Still, while investors still feel they need more exposure to AI-related activities, “all asset allocators are concerned about equity concentration risk.”
Keith Lerner of Truist Advisory Services says the firm is downgrading the technology sector to “neutral” after the sector largely outperformed the S&P 500 since its “overweight” decision in November.
“While we still have a favorable view of the technology in the long term, in the short term the sector looks large and we wouldn’t be pursuing it,” noted Lerner. “That said, the sector appears far from ‘bubble’ territory and we believe secular tailwinds will persist around artificial intelligence.”
Friday’s options event came at a critical time for markets’ positioning for the second half of 2024 and the Federal Reserve’s next steps. Data showed that U.S. services activity accelerated earlier this month to the fastest pace in more than two years. Separately, existing home sales fell for the third month in a row.
“Investors should prepare for drama,” said Solita Marcelli of UBS Global Wealth Management. “The second half of 2024 appears to be a time of transition and volatility. The decisions investors make now will be critical to effectively navigating this period.”
John Stoltzfus of Oppenheimer Asset Management says he remains positive on the outlook for stocks as prospects for improving fundamentals this year show potential for fulfillment.
“That said, history shows us that the prices of stocks and other asset classes do not rise in a straight line, but tend to scale the proverbial ‘wall of worry,’ requiring prudent diversification, patience and a sense of risk tolerance . and float for private investors and discipline linked to an institution’s mandate for professional investors,” he noted.
Corporate Highlights:
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Apple Inc. is denying a range of new technologies to hundreds of millions of consumers in the European Union, citing concerns raised by the bloc’s regulatory attempts to rein in Big Tech.
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is holding confidential talks with some of its creditors about reducing its debt load and extending short-term maturities, according to people with knowledge of the matter.
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Airbus SE is closing in on a deal with Spirit AeroSystems Holdings Inc. to take over parts of the aerospace supplier’s business, paving the way for archrival Boeing Co. to acquire most of the company.
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American Airlines Group Inc. is suspending training for new pilots until the end of this year, the latest rollback by a major U.S. airline in the face of uneven travel demand and aircraft delays.
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A top U.S. Food and Drug Administration official bypassed reviewers to give 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 disease’s overall progression.
Some of the main movements in the markets:
Actions
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The S&P 500 was down 0.2% at 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 has changed little
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The MSCI World index fell 0.3%
Coins
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The Bloomberg Dollar Spot index was little changed
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The euro was little changed at $1.0692
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The British pound 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
Titles
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The 10-year Treasury yield was little changed at 4.25%
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Germany’s 10-year yield fell two basis points to 2.41%
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Britain’s 10-year yield rose three basis points to 4.08%
goods
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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 help from Bloomberg Automation.
–With assistance from Carly Wanna, Sagarika Jaisinghani, Cecile Gutscher, Divya Patil, Matthew Burgess and Winnie Hsu.
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