NASDAQ100 to push lower since Softbank has been unmasked as driver of US tech rally?

September 10, 2020 10:00

When looking at the massive rally in tech stocks over the last months, with the NASDAQ100 up more than 80% last week from its March low, many market participants were shaking their heads in disbelief – especially given the dark fundamental outlook resulting from the Corona lockdown.

What made the whole move, not just in the NASDAQ100, but also in the S&P500, even more suspicious was the rise in the volatility index VIX which is usually a sign of traders preparing for sharper volatility and drops and which usually does not go hand in hand with new All Time Highs day after day.

So, what happened here? The answer in short is: "Softbank."

Softbank – the invisible hand which drove US tech stocks higher

According to Wikipedia, SoftBank Group Corp. is a Japanese multinational conglomerate holding company which owns stakes in many technology, energy, and financial companies and also runs Vision Fund, the world's largest technology-focused venture capital fund, with over $100 billion in capital.

That "Vision Fund" traded heavily in options of US tech companies like Apple, Amazon, Microsoft, Facebook, Google, and Tesla in the last months.

In fact, observations from investment bank Goldman Sachs showed a "historic inversion" in the stock market with the average daily value of options traded having exceeded shares. July single stock options volumes hit 114% of shares volumes and options on Amazon, Tesla, Apple, Netflix and Facebook showed the highest volumes in July here.

So, here's what happened:

  • Softbank aggressively bought Call options, giving users the right to buy a stock at a pre-agreed price (strike price)
  • Since options are priced based on several variables like price, but also time or volatility, aggressively buying options like Softbank did, drove prices of the underlying stocks higher (sellers of the option will hedge their bet against Softbank by buying in the underlying stock to be capable to deliver if Softbank exercises its call option)
  • This also increases volatility.

While it seems as if, this time, Softbanks bet paid out handsomely, it is a very dangerous sign for the NASDAQ bulls and Equity markets in general, because it illustrates that the recent run higher in Equities has no fundamental driver, but is only the result of speculative excess.

Apple, Amazon, Microsoft, Facebook and Google constitue about a quarter of the S&P500 and are the drivers of a big chunk of recent gains and are potentially about to see a sharp correction, which could accelerate, given the weak seasonal window Equities enter in September, and especially October, in US presidential election years.

How to trade NQ100 CFD in this environment?

Since the NASDAQ 100 dropped by more than 5% last week on Thursday alone and, so far, is down in September by around 5%, an even deeper correction might be around the corner, especially if the NQ100 CFD breaks below 11,000 points.

Such a drop would activate the region around 10,400 points as a first target on the downside.

If one plans to trade the NQ100 CFD Short, we'd favour a short position into a potential retracement around 11,900/12,000 points with a stop above the current All Time Highs at 12,500 points and 10,400 points as a target on the downside:

NQ100 CFD daily chart

Source: Admiral Markets MT5 with MT5SE Add-on [NQ100] CFD daily chart (between May 13, 2019, to September 09, 2020). Accessed: September 09, 2020, at 10:00 PM GMT. Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the NQ100 CFD increased by 7.8%. In 2016, it increased by 8.4%. In 2017, it increased by 30.5%. In 2018, it fell by 1.6% and in 2019, it increased by 39.7%, meaning that in five years, it was up by 108.5%.


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