The Bears Have Entered the Ring: The Battle for the Bull Market Rests in the Hands of Retail

|September 14, 2020

Last week, we ended down across the board. The Nasdaq, Dow, and S&P closed a combined 8.3% lower, and it had the bears coming off the sidelines and getting ready to make their move.

But the bulls weren’t giving up that easily, not Friday, not today, maybe not ever.

We’ve got a way to go before we’re in bear market, although we’re tapdancing on the edge of a correction, at least when it comes to the Nasdaq Composite. But we still have lower to go, if we end up going lower, that is.

The bears are looking to get in as the hedging unwinds, chasing Big Tech lower, and election madness begins to ramp up.

We could be headed lower… but they key word here is could, and where the markets are headed next lay in the hands of one very specific group: the retail investors.

The Battle of the Bulls and the Bears Rages On

The bulls are technically on the ropes, on account of the Nasdaq Composite falling into correction territory and bears sense there’s an opening for them to gut check bulls here, especially since there may be more gamma hedgers yet to unwind their positions as the election comes more into focus.

The fight will be in the hands of “retail” because markets are being driven by retail like never before.

It started in May this year, when 13% of all options trades were for one contract. That’s a retail, hoofprint to be sure. And, 2.3% of all stock trading volume was made up of trades with a dollar value of less than $2,000.

By August, single-stock (not ETFs) options volume averaged 18.4 million contracts per day, a record and 80% more than in 2019. The average trade size was six contracts, half what it was two years ago.

  • Goldman Sachs says single-stock options volume is now 120% (in terms of notional value of underlying shares per options contracts) of the daily volume traded in shares, that’s up from 40% three years ago.
  • 60% of all opening options contracts have on average two weeks to expiration, according to Susquehanna Financial Group.
  • 44% of options trades on any given day are now retail trades.

That’s what’s been driving markets higher.

Retail Investors Just Keep Getting Lucky

It’s been a brilliant, momentum-motivated market.

Only, retail traders and investors don’t know how dumb lucky they’ve been.

What I’m saying, without trying to insult retail speculators, who by the way have been brilliant in their bold betting and been making money, I hope, because they need it and deserve it, have been successful because they triggered a positive feedback loop very few people understood.

Only, what goes up, must come down.

What was, and still is, a positive feedback loop can reverse, and become a negative feedback loop. We’re not there, yet. But we could get there.

That’s what I mean when I say that the epic battle between bulls and bears is in the hands of retail.

If they buy this dip, the game’s got more runway, at least enough for a short field landing or takeoff.

If they don’t buy this dip and selling takes big names down to and through their support levels, the next couple of rounds might be quick and go to the bears.

What to Watch:

Facebook Inc. (NasdaqGS:FB)‘s first support was at $278, which we broke on an intraday basis, next up it’s $225-$230.

Apple Inc. (NasdaqGS:AAPL)‘s first support at $118 was broken intraday last week then again on Friday, when we closed at $112. Next support is at $99, then $88, then $82.

Amazon.com Inc. (NasdaqGS:AMZN)‘s support was at $3,245, which it broke. Then $3085, then $2866. Be careful, Amazon traded through its second support at 3085 intraday on Friday, hitting 3083, but closed at $3116.

Microsoft Corp. (NasdaqGS:MSFT)‘s first support was at $217, it broke that. Next is $200, it got close to that on Friday. Below that there’s support at $187.

Google’s Alphabet Inc. (NasdaqGS:GOOG) had support at $1543, which it broke last week. Next up is $1462, then $1398.

Tesla Inc. (NasdaqGS:TSLA)‘s going to be a rollercoaster and maybe of little bellwether value since it crashed 25% and is going to be bid up and shorted right, left, and center.

Keep your stops in place. Keep raising them as we go higher if we go higher. And enjoy the water while you can see above the splashing.

Until then,

Shah


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