What Happened Last Week Was an Illusion – and It Could Bring the Market to Its Knees

Shah Gilani|September 8, 2020

Last week was entirely an illusion.

The week started out well, got better by Wednesday, but fell apart. And what looked like a nasty storm on Thursday seemed to calm itself down by the end of trading Friday.

But the storm hasn’t passed, and if it doesn’t dissipate quickly, meaning by this week or by the end of next week, it could completely obliterate what progress we’ve made.

And, if all hell breaks loose, we could easily be down 20% or more by the end of next week, or sooner.

Here’s how you can prepare no matter what happens…

Monday was about Apple Inc. (NasdaqGS:AAPL) trading at its new four-for-one stock split price and Tesla Inc. (NasdaqGS:TSLA) trading at its new five-for-one stock split price, and more retail accounts buying more shares of both.

Tuesday was more of the same, and Wednesday was another “buy the winners” and “let’s notch new all-time highs” kind of day.

It’s was all good until Thursday.

All kinds of explanations were suddenly being thrown out for why stocks were tanking. Not all stocks mind you, mostly: Facebook Inc. (NasdaqGS:FB), Apple, Amazon.com Inc. (NasdaqGS:AMZN), Microsoft Inc. (NasdaqGS:MSFT), and Google, the gang that makes up 25% of the S&P 500; and Tesla, the perpetual motion machine suddenly making shorts a few bucks.

One popular narrative had it that, with a vaccine maybe just around the corner, perhaps the stay-at-home, work-from-home, and coronavirus stocks were going to be replaced with “cyclical” stocks.

But I didn’t think the selling on Thursday had anything to do with any of that; it was too “mechanical.”

Here’s what I mean:

On Friday, a story broke at the Financial Times that SoftBank was trading big in the FAANMG (this includes Microsoft) stocks. The article titled, “SoftBank unmasked as ‘Nasdaq Whale’ that stoked tech rally” said it all.

SoftBank had been the “whale” (a giant player in Wall Street parlance), buying tech shares and call options on tech stocks over the past couple of months, helping drive their prices up.

While no one’s sure if that caused selling on Thursday, I’m telling you that SoftBank was the cause and it’s not over.

The problem is mechanical; that’s why the selling felt that way.

SoftBank has been playing what I call a “genius game;” it’s genius not because it’s a backdoor move or illegal or anything like that, it’s genius because it’s so simple, so elegant, so brazen it deserves kudos.

There’s only one problem, sometimes genius fails.

SoftBank’s play was to ride the momentum boosting the FAANMG stocks and the likes of Tesla, Adobe Inc. (NasdaqGS:ADBE), Zoom Video Communications Inc. (NasdaqGS:ZM), and others, by buying them as they went up, boosting them higher and creating more momentum, and buying massive amounts of call options on some of the biggest names, signaling to options watchers there were big bullish bets on those stocks going even higher, which brought in other stock buyers and options buyers, which boosted stock prices more and elevated the profit inherent in the calls SoftBank was buying.

The fact that they did it in such size, applying probably more than $10 billion, is what made it all work.

Until it didn’t.

In a nutshell, what happened, and I’ll use Tesla as an example, because I’ve written about Tesla’s convoluted upward trajectory and explained it on Fox Business Network’s Varney & Company show, is you target a stock like Tesla (which is the easiest one to manipulate because there are only about 148.5 million shares available to trade) and you keep buying it.

In Tesla’s case, naysayers keep shorting it the higher it goes, because they don’t believe the stock’s worth it. As a “whale,” you have the capital, so you buy more and force the shorts to cover at higher prices and you make money on the stock you bought lower. And you keep doing that – wash, rinse, repeat. It takes a lot of hutzpah and capital to do that.

It takes an order of magnitude that few people understand to also do that in Apple, Amazon, Facebook, etc. It’s not that the big tech names were being shorted; it was an even bolder play to buy them and trigger momentum behind you, then buy more, and buy calls to keep those expensive stocks climbing higher. That’s genius, crazy bold, and it worked.

Until it didn’t.

After no one knew what really happened on Thursday and Friday, with news that SoftBank was a buyer of the big names, bids came back in the afternoon and the Dow, which was down 2.29%, ended down only 0.56% on Friday, and down 1.8% on the week.

The S&P 500, which was down 3.06% earlier in the day, and over Thursday and Friday down 4.3% at its worst, ended down only 0.81% on Friday and down 2.3% on the week.

The Nasdaq Composite, which was down 5% at one point on Friday, and down 10% over the two-day slam-down, ended Friday down only 1.27% and down 3.3% on the week.

Not a bad way to end a crazy week.

But the selling’s not necessarily over – maybe not by a longshot.

What you don’t see, what people didn’t understand on Thursday, is SoftBank hasn’t sold most of its positions and as big dealers realized they could and had to try and crush SoftBank, they started selling all those big names on Thursday.

Why, you ask? Why are dealers and market-makers trying to crush Softbank? The answer is frightening, a little complicated, and going to rock your world when I explain in tomorrow’s Total Wealth what’s happening behind the curtain.

In the meantime, don’t be complacent because last Friday wasn’t the blowout it could have been.

It’s now out there.

Double-check your stops, because while could pass, the whale might swallow us all.

Sincerely,

Shah