Naming things is hard.

The Weekly Forecast.

Last week was an interesting week to be in the markets. If you followed my last weather forecast - https://nopeitslily.substack.com/p/what-could-go-wrong - we saw it play out for the most part until about Thursday afternoon, where the market decided to yeet itself from 384 to 396 at close. The details are way more juicy, though.

Wednesday

On Wednesday, we saw the NOPE close at (perhaps not a record, but close to it) -160, which per historical correlation tends to indicate a nearing to the end of a correction period. This is near in the sense of time, not of price — my prior research indicated that, forward looking 14 or 30 days, the median time-to-lowest-low compresses as NOPE negative magnitude goes up (and the reverse happens for positive magnitude).

This unfortunately played out pretty much instantly, as from the Thursday lows mid-day we jolted up to 390, and the following day closed at 396.

The reason for Friday’s rude close has been speculated to be due to the forced liquidation of Archegos Management run by ex-Tiger Cub Bill Hwang, who in the true spirit of degeneracy decided to long China and media growth stocks at high margin.

This was easily observed by the vaporization of $VIAC this past week, which climbed from around $100/share to bottom around $40/share within a 5 day period.

What does this have to do with Friday’s close?

In my true investigative reporter fashion, I dug into the tape after close and observed interesting buying behavior only on SPY. When filtering for 500 lots and above option buying, one can observe that SPY lit up like a firecracker, while SPX, EEM, IWM, QQQ did not.

What’s notable, at least rumored on the FinTwit, is that Archegos was a long/short fund—long China/media growth names (VIAC, DISCA for example) and short the US indices (ES, NQ).

Similarly, it could easily be deduced that the bid was being lifted on the index itself and not just a weird component by looking at the graph correlations of the major holdings:

The reason this occurs is due to the creation/redemption dynamic present in ETFs like SPY. SPY, like all ETFs, has a net asset value, which represents the “true” value of the actual underlyings that make up SPY (the S&P 500). However, during especially times of realized volatility, SPY’s price can be temporarily dislocated from its actual net asset value. An example was Friday most likely (do not have SPY.NAV data). As buyers rapidly lifted the offer on SPY, this caused arbitrageurs (APs) to similarly impact the price of all SPY holdings, proportional to their weight in the index.

That said, as Jay noted to me on Friday, there was an absolutely massive imbalance in buyers versus sellers in the ES market, which only increased as the rally continued end of day. This implied that there wasn’t really any substantial consensus buying pressure causing it; more, sellers were more than happy to sell into the rally.

Based on the news of Archegos and the related later disclosures by Nomura and Credit Suisse, it seems likely that the root cause of Friday’s oddity was the forced deleveraging and potential margin call of Archegos/Bill Hwang, with potential ramifications across the industry.

Here’s Lily’s reconstructed hypothesis for what happened:

• Morning/Afternoon Friday: Massive block sales of various securities brokered by Goldman Sachs appear, crashing the price of various growth names. This notably impacts the indices negatively (reflexivity/fear), leading to a low on SPY around 2-3 PM EST. This is later pinpointed to be the forced deleveraging of Archegos due to a margin call.

• Almost instantly after the low of the day, SPY rockets up (at 2:50 PM EST, caught by NOPE as a bullish signal) over $1 within 5 minutes. This continues to gain pass in the last hour of trading.

  In the last 30 minutes of trading, massive (>500 contract) call option buys hit SPY at mid or ask, indicating market participants are betting bullishly (in general on SPY and other indices, usually market makers are long calls/market participants tend to be short).

  In the last 15 minutes, the ramp dramatically accelerates, and SPY moves nearly $2 within 10 minutes. Large amounts of options become in the money rapidly. This behavior is similarly observed across the major components of SPY, indicating index movement rather than a specific underlying.

I speculate that the EOD ramp was largely fed by the forced deleveraging of Archegos’ short index positions, which explains the ramp in the last 30 minutes of the day (the highest volume, traditionally). This was done price-inflexibly, meaning one (or multiple) buyers needed to rapidly close positions, and speculators and other market participants were more than happy to join the party. The combination of increased call buying and rapid index movement spiked realized volatility, which given it was also an options expiration date massively spiked gamma and caused market makers to need to rapidly buy shares to hedge. This accelerated the end of day spike.

NOPE also decided to light up like a firecracker. After Wednesday’s dive into the abyss, we ended on a high NOPE (get it) on Thursday, indicating by the magic stonk gravity that Friday should be red. When we instead decided to yeet into the orbit of 400, SPY ended Friday at an ominous 125 NOPE.

What could go wrong? The last time something similar occurred was 3/15/2021.

As I’ve said before, high positive end of day NOPEs, especially clustered, are usually not a good sign.

Thoughts for Next Week

I’m going to keep this brief, simply because I’m a bit burned out by predicting constantly, and also since much of the background of last week has stayed roughly the same.

• Based on current futures, the high EOD NOPE on Thursday and Friday, and the current situation unfolding with Archegos, I recommend long gamma, long vega for this coming week. I do expect us to see a noticeable volatility spike, and think that the dip in the growth/media stocks may not be immediately buyable (e.g. $VIAC, $DISCA).

• This may, depending on the severity of losses and the size of the positions, cause continued deleveraging across the growth landscape, and in general growth investors/speculators don’t really catch the knife often (exception, as I noted in a prior posts, seems to be Tesla).

• While tomorrow looks red (unless the Europeans buy the dip, or futures massively change in the next few hours) it seems less certain that the rest of the week will follow.

• In general I anticipate ramifications across the growth/speculative landscape for the coming week; buying quality companies at a discount might be the best game here. That said, I would not sell the news here, depending on your time horizon. I don’t think this notably impacts the speculative regime, although the continued decline of call option volume is concerning (in that regard).