The move on Thursday was something that caught the market off guard but if you read my work (even free on Twitter between my general sh*t talking) you had an idea of what could be - but like I’ve said, nobody really pays attention.

We would rather read esoteric macro reports, follow the latest Michael Burry headline or contemplate data that nobody has any actually intention of using to make a trade with.

I avoid all of that stuff, like the plague, and for good reason.

I run risk and have done so for 15 years so I don’t care about pointless macro reports, SP500 stats, some new market headline of the week or other general time-wasting, non-idea-generating conversations.

I care about what matters and to me it’s generate returns.

That being said, instead of pointing to some esoteric reason as to why volatility is here to stay, or why Thursday happened, I am going to try to explain it in the best way I know how and that comes from actually doing this day in and day out.

(To be clear, I am not saying others don’t run risk either, but those that do don’t usually waste their time with pointless data, we’re after idea generation, period.)

I’ve read a few pieces as to why the Thursday market sell-off happened and they were a mix of:

It’s hard to point to the exact “why” but it was my view that morning, and the night before, that we had the chance to do what we say for one primary reason: the high-time frames.

Yes, I am talking about price-action and understanding how it works, a taboo amongst the alleged ‘elite’ value and macro folks out there who love to hear themselves talk rather than actually generate alpha — which is another reason while I’ll always be thankful for my experience on a futures trading desk!

The large time frame on the $QQQ ( ▲ 0.75% ) and $SPY ( ▲ 1.0% ) had been bearish for some time but it was that weekly candle that had to break “up and out” to get the gap up to sustain, and, if not, we would give back all the gains.

You could, if you’re initiated, see it in the candles and levels that there was something brewing that day.

But why the velocity of said move? Why no standard, orderly, move lower?

This is where my views on a new vol regime come in.

First, retail options trading. The amount of retail options trading today on the $SPX ( ▲ 0.98% ) $SPY ( ▲ 1.0% ) $QQQ ( ▲ 0.75% ) on ODTE options is a large majority of the order-flows and that concept of short-term profits for fast moves has moved over into the popular Mag 7 Stocks as well, which also have weekly options.

Back in 2011, when they released the majority of these, the market for them was slow, I was there, I traded them and the vol was nothing like it is now.

When these flows shift from long calls to long puts theres a dynamic shift in market structure that takes place and that shift exacerbates the moves. This was eerily similar to what happened in Q1 as well and I made mention to it then but, ultimately, it was covered up by the tariffs instead.

Second. The margin debt as of recent is a concern and a big deal. I told Business Insider the other week when they asked me about Burry that it “was like tinder already soaked in gas and all it takes is a lit match”. We do this every time the markets get into a bull cycle and then nobody leaves the party early and calls it a night, until the eventual hangover at 6am when it’s already too late.

Third. The crypto margin calls and leverage. I don’t really follow these markets, I’ve traded Bitcoin, bought it at $3,200 and change, sold it and made about a quarter-buck doing it, but I don’t really trade it — primarily because at it’s root, its a volatility vehicle and I can get my vol fix (as we all saw) trading good old stonks.

I’ve noticed this volatility the last few years, even more so, this year because we’ve had to trade in and out of names quite a bit, which, again, you’re “not supposed to do” if you’re a long-term investor.

Good thing for us, is that I never paid attention to much of what “you should do” and rather paid attention to what is working and what is not. Our views for Core portfolio positions has been that of 3-24 month hold times where we see a valuations mature, or meet price targets (same thing,sorta).

But, that has all changed and moves that would normally take +12 months are happening in two to three months now.

One of them, Boeing $BA ( ▲ 0.18% )

A +40% move in basically 3 months time this year to then go flat, to now back to where we almost started the move in less than 2 months.

But sure, you can look at this and say “it was the April rally, everything lifted Dan, so how do you reconcile that?”

Let me point you to $GNRC ( ▲ 4.15% ), which was a Core holding for portfolios this Summer, when we cashed in and thankfully so because there was a time there after that Summer earnings where that little voice in my head (the good kind) told me we should not sell it and keep it into the next earnings.

That would have been a bad idea as you can see below.

I wrote about this name to our clients in Q2, citing my views on it as a play on the AI Capex spending and data center power needs, and at that time, we were flat the position. Earnings came and for those who watched the stock was -20% pre-market, to effectively flat an hour later, to then down -20% and more the next day.

These two are just examples of what these past few years have been (I can give out at least five more) and this is part of what I call the “new vol regime” in where moves that would happen in quarters are happening in weeks.

In fact, when I was writing our letter to clients at the end of Q2 and looking back at our portfolios it brought up a memory from pre 2010 in an internship I had where someone told me “take your profits or someone else will” and that could not be more true for this new market vol regime we’re all in today.

So, my views are just that: it’s a combination of things but primarily that the underlying options trading on the equity and equity index markets are driving the higher volatility we’re seeing in the markets.

Today, that has all changed, we’re getting a years worth of moves sometimes in a matter of weeks and I don’t think that is changing anytime in the near future.

I’ve made this case before in more complex terms, I wrote a piece earlier this year titled “It works until It Doesn’t” that you can read that discusses the ETFs all invested in the same names (which also causes this vol) but my point is that this volatility regime is here to stay.

And for those that are friends who have traded futures with me (pre-2020) you remember our years from 2015-2018 where we were lucky to get an 10 point move on SP500 E-Minis and, instead, would find ourselves playing Battlefield 4 online instead as we patiently awaited any move but those days are gone which is also good, because BF6 sucks (or maybe I do).

Yours truly,

Dan

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