"Brutal Tape": Goldman, JPM Traders Share Market Carnage Thoughts From The Front Line

On a day when brutal liquidations across the megacap sector including the worst selloff for Google since March 2020 sent shockwaves across markets, stocks finished sharply lower with the Nasdaq suffering the worst day in 2023, as the selloff in rates returned and we saw another sharp bear steepening session in yields as oil spiked higher again. As JPMorgan notes, 4 megacap tech stocks (GOOGL, AMZN, META, NVDA) contributed over 50% of the index’s decline (GOOGL's 9.6% drop accounted for ~25% of NDX’s decline today amid disappointing cloud growth, while AMZN, NVDA and META contributed another 25%). Naturally, shorts are working with the Goldman most shorted basket tumbling 4% (a -2.4 sigma move).

What did today's carnage look like from the front line? Below, we first share some thoughts from JPM TMT trader Ron Adler (excerpted from the full report available to pro subscribers):

Google + 4200 = Hold? Positioning and expectations are paramount, while the myth that anything in this market is truly and appropriately “priced in” remains a misnomer. Shorts continue to work, and while we are seeing some shorts get monetized at these levels, earnings season is providing new excuses for traders to press. Traders continue to trim the tails of their portfolios, and per usual, sellers are lower. MegaCap remains an asset class, with most funds moving within the group (and not rotating elsewhere). GOOGL is down the most on earnings print since their print on 10/25/22 (closing -9.14%); the trauma of 3Q22 earnings is still fresh in investors’ minds, and many are forced to ask whether it’s worth making the bet on META (expectations high) or AMZN (probably had the best upside scenario in MegaCap tech, but the downside concerns are promulgating today) or just hang out with Satya Nadella for a while. On the software spending side, you probably feel better about stabilization, but genuine green shoots or improvement remains absent. There also remains the AI overhang on spend, providing every excuse for companies to delay projects and temper current workloads (ex-AI, numbers aren’t overly exciting).

If you have a longer-term lens, I’d be buying GOOGL here. If you’re looking for a short-term bounce to help performance into year-end, I think you’re making a market call. Investors are frustrated on the lack of clarity around expense growth, OI was light for the Q (along with elevated costs in Q4) and cloud was disappointing. That will take time to work through. Like the point above – with shorts underperforming and momentum working, investors will continue to stick with what has been working (see NFLX Equity).

And here is the market mess from the lens of Goldman trader Mike Washington (excerpted from the full report available to pro subscribers).

MAX PRESSURE. Very challenging tape today with a myriad of negative stories to point to. Cyclicals underperformed defensives signaling a downgrade of GDP. There was hot macro data with a strong beat in new home sales, making new ytd highs. Yields accelerated their selloff post the 2bp tail in the 5y note auction (US 10 Yr + 12bps @ 4.95%). We are in the heart of earnings season with ~40% of SPX market cap set to report this week and so far there’s been poor risk/reward in tech and significantly tougher asymmetry today.

The wall of worry continued to grow with 1) MEGA CAPS WEIGHING following GOOGL EPS -9.5% would match the worst T+1 earnings move in more than 10 years (biggest one day drop since March 2020). We think pressure was due to lack of positive EPS revisions. 2) PAYMENTS CAPITULATION following Worldline (WLN FP) shares collapsing 59% in European trading after the payments firm lowered its outlook for the year due to economic headwinds. We also got an intraday headline in V/MA that pushed both stocks lower: Visa, Mastercard face lower cap on swipe fees under Fed proposal 3) NOWHERE TO HIDE IN HCARE with Tools under pressure on the TMO print/guide down, leading the broader space lower. MedTech underperforming on GLP-1 concerns. Biotech making fresh 52 week lows. On the heels of all of this, systematic supply ($21b S&P over remainder of the week) + geopolitical headline roulette running in the background certainty doesn't help. S&P 200dma of 4238 was breached (again).

As Washington further notes, the Goldman desk was relatively more active, reaching a 6 on 1 – 10 scale in terms of overall activity levels: "Overall our floor finished -273bps better for sale. L/O paralysis continued and flows finished balanced (we did see some defense for GOOGL vs supply in AMZN given heightened share loss concerns vs. MSFT azure). L/O flows in order of magnitude by net notional: net buyers of info tech vs sellers of energy, discretionary, and industrials. Our desk saw unwindy behavior from HFs, selling out of their payments longs and flipping short after Worldline debacle. HFs finished +175bps net buyers (on 2x the notional of LOs) after covering pockets of energy, comm services, and industrials vs selling long info tech and financials." 

In the sea of red, there were a couple of bright spots:

• 1) GM/F appear to be moving close to a potential deal with UAW. Both F/GM rallied intraday on the back of these headlines.
• 2) Retail outperformance (Apparel specifically) as people position for November where seasonality is particularly strong for retail/apparel, gasoline prices at the pump are down 27 days in a row, and weather temperatures after this week screen below normal averages across the US due to the coming power vortex.

Finally, we turn to Goldman's derivatives desk, where vol was small bid on the day as skew flattened on the selloff. However, SPX November vol was close to flat which is surprising to see given we almost 2x outperformed the daily straddle. Flows were relatively muted, but the desk saw rolling of puts down and out. From an index perspective, Goldman traders like SPX 3m-6m call spread collar to gain long delta/short vega exposure on a spot up vol down dynamic.  

In singles, the desk likes to gain upside exposure in semi names with steep skew. NVDA, AMD, MRVL, and MU all have skew in the 80% percentile, which makes buying a call and selling a put screen attractive. GOOGL ended the day down 9.51%, as we saw the most amount of put volume since early May

More in the full notes from JPM and Goldman available to pro subs.