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Stocks are in triple-digit free fall at midday Monday; the 0.1%, 0.2%, and 0.8% gains they eked out by the Friday close are ancient history.
Superficially, what we saw yesterday and may very well see again today is culmination of headline and narrative-driven pressure that began building last week and hasn't been resolved...
The novel coronavirus is spiking across the United States and Europe, hitting record highs in some places, precisely as two leading vaccine candidates, Johnson & Johnson (NYSE: JNJ) and Eli Lilly & Co. (NYSE: LLY), have hit the brakes on their advanced trials, citing "adverse reactions."
We had jobless claims jump unexpectedly, with zero movement on fiscal stimulus to aid recovery.
So a lot of investors were and still are fixated on the news, but the really important thing to understand is how and why the market leaders failed - as it points to what we should be doing.
Here's what's happening...
Investors Have Changed Their Mindset
Big Tech started off well enough last week. The "return of tech" as the leadership sector was encouraging at first, especially since what happened in August looked as though it might be happening again.
DON'T MISS IT: We're in the midst of a generational buying opportunity, and these three stocks are "screaming buys." Find out more...
Remember, back in August, options buyers kept bidding up call options on tech stocks heading into expiration, and the dealers that sold those call options had to hedge against the rising market by buying underlying stocks against the calls they'd sold. That's a positive feedback loop.
As we approached options expiration this Friday, the same thing had happened: Open interest in call options on the big tech stocks and bets they would go up were high...
... but we didn't see the positive feedback loop we experienced in August.
Quite the contrary, in fact. Apple Inc. (NASDAQ: AAPL), where investors had tons of call options at strike prices at $120, $121, $122, and higher, closed on Friday at $119.02, rendering every single one of those calls worthless.
Score one for the dealers, who fought back by trying to sell down stocks against which they'd sold calls, to keep all the money they took in. This time around, they didn't just keep buying the underlying stocks and handing victory to call-buyers - this time they doubled down, and didn't ramp up underlying hedge buying, which had the net effect of pushing tech stocks down.
The big takeaway isn't that dealers are bigger than the market, though they certainly can sway it at times, it's that the "mindset" about tech stocks has changed, and dealers bet - correctly, it so happens - they could knock prices down.
And so stocks "churned." To be clear, I don't mean the illegal scam where a broker makes unauthorized trades. I mean, "churned," like cream, or stirring a big pot of sauce - selling here, buying there, buying here, selling there.
Investors moved into cyclicals, stocks that rise and fall on the business cycle, and classic value stocks mid-week.
What's changed? Well, the underlying, long-term strength of the market sure hasn't.
But, in the short term at least, investors are seeing through the prism of a Biden victory.
Nothing in the polls should be taken as a stone-cold lock or as a given, but, as Biden increases his lead against Trump, investors, aware he could very well raise taxes (including maybe taxing capital gains as ordinary income level), are starting to consider what that means.
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The conclusion they've come to is other investors will start taking profits this year, maybe before the election. If Biden wins, selling might start with a bang, and it would be too late.
And so investors aren't buying hand over fist anymore, not trying to move markets into expiration by bidding up the underlying stocks of the options they bought.
And investors who bought those underlying big-cap tech stocks, not because they had call options on them, but because they expected them to go higher, didn't step up.
That's what's really happened here. That's important. It's a warning sign to batten down the hatches; selling is probably going to accelerate into the election.
Is it the end of the world? No way - not even remotely...
How to Make the Absolute Most of What's Coming
Setting aside the historical fact that administrations of both parties usually preside over growth in the stock market, more relevant to the here and now is these investor fears over higher taxes are unfolding in what's still an extremely bullish environment for stocks.
The cheap money, the Fed backstop, the dwindling supply of shares, and all the reasons for continued market gains we've talked about - none of that's changing anytime soon.
When you look at it that way, the current sell-off starts to look more and more like opportunity.
So - above and beyond releasing my "lightning round," with details of 50 stocks to think about buying and selling - I'm getting my shopping list ready. I think we're going to be presented with plenty of bargains between now and early November. This would be the ideal environment for "lowballing" the market and naming your own price for stocks you'd like to own. I think the bulls will probably come back in on a tide of certainty.
Keep your eyes peeled for some charts I'll be sending out later this week on where to buy stocks like Apple, Microsoft Corp. (NASDAQ: MSFT), and Tesla Inc. (NASDAQ: TSLA) - all of which closed lower yesterday, by the way - and other must-own companies.
In the meantime, check out my presentation on what toxic stocks may be lurking in your portfolio...
You see, almost no one realizes it, but some of the most dangerous, wealth-wrecking stocks... are also some of the most popular picks on the market.
Fortunately, I realize it. So today, I'm naming names on the specific stocks to run screaming from.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.