The Coming Gamma Nightmare
Submitted by QTR's Fringe Finance
One macro strategist is now making, in far more measured institutional language, the same argument I made days ago: this is not a normal bull market.
ZeroHedge made a great post on Tuesday highlighting analysis from Bloomberg macro strategist Simon White.
White notes that a 10% rally in a month is hardly unprecedented. What is unprecedented is what is happening underneath it, however. He points to the fastest rise in S&P gamma ever recorded, alongside historically low correlation and exceptionally high dispersion, a combination that suggests this rally is being driven by aggressive speculation in a very small group of stocks rather than broad participation across the market.
In plain English, a handful of names are doing an enormous amount of the lifting while the rest of the market moves independently, and — as I have been arguing for months, if not years at this point, options activity is distorting normal price behavior.
White’s gamma observations are particularly important because they help explain why the market feels increasingly detached from fundamentals. Gamma measures how much options dealers need to buy or sell stock to hedge their positions.
White notes that gamma was deeply negative at the end of March and has now surged to near-record highs in just weeks, an extraordinary move on its own. He also points out that call buying has exploded in single stocks while call volumes in broader index products have actually declined.
As I’ve speculated (and even entertained as a bull case for certain equities at points), that tells you this is not broad investor optimism about corporate America or economic growth. It is concentrated speculation in a handful of AI and semiconductor names like Micron Technology, SanDisk, and Intel, where traders are crowding into the same momentum trade.
White also highlights something I talked about days ago that should make investors especially uncomfortable: stocks recently rose while volatility rose alongside them.
As I wrote earlier this week, “this is obviously no longer a normal bull market driven by earnings growth, healthy economic expansion, or rational price discovery.” I also noted that “we now have proof it is a market being mechanically forced higher by options flows, dealer hedging activity, and an AI-driven speculative frenzy that is beginning to resemble the most extreme periods of financial excess in modern history.”
White’s work effectively validates that argument.
One of White’s most important points is that...(READ THIS FULL ARTICLE HERE).