(Bloomberg) — A flood of options expirations on Wall Street has not only made stock traders more cautious, it’s also sent one of the bull market’s leaders into a roller-coaster ride.
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About $5.5 trillion is estimated to mature on Friday in the quarterly “triple witching” of derivative contracts linked to stocks, index options and futures. This time, Nvidia plays a new role: The value of contracts linked to the chipmaker expiring on Friday is the second-largest among underlying assets after the S&P 500. The maturity coincides with an index rebalancing by the S&P Dow Jones Index.
For Steve Sosnick of Interactive Brokers, a “significant” rebalancing will come in the Technology Select Sector Index, the benchmark for the $80 billion XLK exchange-traded fund.
“Nvidia’s index weighting will increase dramatically, primarily at the expense of Apple’s,” he wrote. “Given the outsized influence that mega-cap tech stocks in general, and Nvidia in particular, have on the broad market index, it is not unreasonable for traders to be wary of any big late moves.”
As the contracts expire, investors are expected to trim positions, sending volumes soaring enough to shake up individual holdings. S&P 500 volume was 45% above average last month. Nvidia mostly recovered from a roughly 5% plunge before falling again. Apple outperformed.
The S&P 500 fell to around 5,465. Nvidia lost about $200 billion in the two days. The company’s market capitalization was about $3.1 trillion as of Friday, lower than Apple’s $3.2 trillion and Microsoft’s $3.3 trillion.
The 10-year government bond yield was little changed at 4.25%. The France-Germany risk premium closed at its highest since 2012.
The ongoing AI boom that briefly made Nvidia the world’s most valuable company this week has also sparked record inflows into tech funds, according to strategists at Bank of America. About $8.7 billion flowed into tech funds in the week ended June 19, according to a note from the bank citing data from EPFR Global.
With political turmoil in France stalling Europe, “the ‘all roads lead to Nvidia’ trade is reinforcing,” said strategist Michael Hartnett. Investors still feel the need to increase exposure to AI stocks, but “every asset allocator is concerned about equity concentration risk,” he said.
Keith Lerner of Truist Advisory Services said his firm is downgrading its rating on the technology sector to neutral after the industry has significantly outperformed the S&P 500 since its overweight outlook in November.
“We still have a positive long-term view on technology, but in the near term the sector seems to be trending upwards and we’re not going to chase it,” Lerner said. “That said, the sector seems far from a bubble and we believe the secular tailwinds around artificial intelligence will continue.”
Friday’s options trading came at a critical juncture for market positioning and the Federal Reserve’s next steps for the second half of 2024. Data showed U.S. services activity recovered at the fastest pace in more than two years earlier this month, while existing home sales fell for a third straight month.
“Investors should prepare for drama,” said Solita Marcelli of UBS Global Wealth Management. “The second half of 2024 is likely to be a period of transition and volatility. The decisions investors make now will be key to navigating this period successfully.”
John Stoltzfus of Oppenheimer Asset Management said he remains optimistic about the outlook for stocks as expectations of improving fundamentals this year point to the possibility of this coming to fruition.
“That said, history shows that prices of stocks and other asset classes do not rise in a straight line, but tend to climb what is known as a ‘wall of uncertainty.’ For individual investors, this requires careful diversification, patience and a tolerance for risk and volatility, and for professional investors, discipline linked to the institutional mandate,” he noted.
Company Highlights:
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Apple Inc. is withholding a range of new technologies from hundreds of millions of consumers in the European Union, citing concerns raised by regulatory attempts by the bloc to rein in big tech companies.
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Airbus SE is close to reaching a deal to buy part of aerospace parts maker Spirit AeroSystems Holdings Inc’s business, clearing the way for rival Boeing to buy a majority stake in the company as early as next week.
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American Airlines Group Inc. is suspending training for new pilots through the end of the year, the latest withdrawal by major U.S. carriers faced with imbalances in travel demand and flight delays.
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Top officials at the U.S. Food and Drug Administration (FDA) have broadly approved Sarepta Therapeutics’ gene therapy for a rare pediatric muscle disease, overriding reviewers’ comments, despite a lack of data showing the therapy actually slows the disease’s progression overall.
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British soft drinks maker Carlsberg said it was considering its options after BritVic rejected an unsolicited takeover bid that valued the company at 3.1 billion pounds ($3.9 billion).
Some of the key market developments:
stock
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The S&P 500 was down 0.1% as of 3:44 p.m. New York time.
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The Nasdaq 100 fell 0.1%.
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The Dow Jones Industrial Average was little changed
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The MSCI World Index fell 0.3%.
currency
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The Bloomberg Dollar Spot Index was little changed.
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The euro was little changed at $1.0694
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The British pound was little changed at 1.2649 to the dollar
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The Japanese yen fell 0.4% to 159.54 yen to the dollar.
Cryptocurrency
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Bitcoin fell 1.5% to $64,088.96.
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Ether little changed at $3,526.4
Bonds
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The yield on the 10-year Treasury note was little changed at 4.25%.
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German 10-year bund yields fell 2 basis points to 2.41%.
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UK 10-year government bond yields rose 3 basis points to 4.08%.
merchandise
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West Texas Intermediate crude fell 0.8% to $80.66 a barrel.
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Spot gold fell 1.6% to $2,322.25 an ounce.
This story was produced with assistance from Bloomberg Automation.
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