RESOLVING THE LEDGER
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From the opening bell on Tuesday it was clear stocks were heading for a rally unlike many in recent memory. The Cboe trading floor in Chicago erupted out of the gate with a raucous roar and didn't let up until the closing bell as the S&P 500 extended a four-day gain to just shy of six percent, lifting the benchmark gauge for U.S. stocks firmly out of a two-month range that had bears convinced their moment was just around the corner. Treasury yields fell, crude oil dropped and beaten-down tech stocks rallied. For the Nasdaq-100 index , a rush to cover shorts and buy upside call options pushed one measure of bullish activity to rare extremes even by this decade's standards. The price of one-standard-deviation out-of-the-money QQQ calls – bullish options bets with a 16% implied chance of success – increased by 42% Tuesday, the biggest single-day change in volatility pricing for those contracts in five years and the ninth biggest shift in a decade, according to index options analytics service Nations Indexes. "Pessimists threw in the towel and optimism was running amok today," said Nations Indexes president Scott Nations. "It's absolutely fair to say this was one of the ten most bullish days for Nasdaq 100 over the past 10 years."
Invesco QQQ Trust tracking the Nasdaq 100, 5 days The Nasdaq 100 rallied 3.3% Tuesday to 29,733, bringing the tech-heavy index to within three percent of its June 3 record after a more than 10% intraday decline through last Wednesday. Nasdaq 100 options volumes are tracking 18% above July's pace this month, according to data provided by the exchange. The activity underscores Nasdaq 100 "heightened investor participation as markets regain momentum following strong earnings and post-FOMC stabilization," Kevin Davitt, research and strategy at Nasdaq, said in an email.
Nasdaq 100, YTD The same out-of-the-money call-pricing metric in SPDR S&P 500 Trust (SPY) options recorded the seventh-biggest jump in the past three years, and call-buying in the S&P was so robust that Cboe Volatility index (VIX) rose alongside stocks -- something that only happens about 20% of the time, according to data compiled by CNBC and Convex Asset Management. "If you want to get long after today, maybe don't buy out-of-the-money calls," Noel Smith, CIO at Convex, said in a call. "This is no longer a good time to buy those calls because if we're up but VIX is down, you're not going to do great, and if it's spot down VIX down, you'll get wrecked." Stocks started stabilizing last week after news broke that superstar hedge fund manager Leopold Aschenbrenner's Situational Awareness had been in the midst of forced selling of billions of dollars worth of popular AI names. At the same time, the Treasury market stopped declining, with the 10-year yield stopping short of last year's highs. On Tuesday, crude oil slipped back below $80 after President Trump suggested a deal with Iran was nearing. Perhaps most importantly, bears who've argued the stock market's in a bubble are being forced to reconcile with enormous earnings growth and innocuous equity valuations. S&P earnings are on pace to grow 47% in the second quarter, which would be the biggest since the rebound from Covid in 2021, according to FactSet. The forward 12-month price-to-earnings ratio is 19.6, below the five-year average. While Tuesday's rally was supported by a big rebound in themes like memory stocks, the gains were supplemented by a two percent rally in materials and industrial stocks. The Invesco Equal-Weight S&P 500 ETF RSP added 1.4%, bringing its year-to-date gain to 14%, edging out the S&P 500's 13% advance.
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