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:

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%.

Discover the world's #1 multi-asset platform

Admiral Markets offers professional traders the ability to trade with a custom, upgraded version of MetaTrader 5, allowing you to experience trading at a significantly higher, more rewarding level. Experience benefits such as the addition of the Market Heat Map, so you can compare various currency pairs to see which ones might be lucrative investments, access real-time trading data, and so much more. Click the banner below to start your FREE download of MT5 Supreme Edition!

Disclaimer: The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:

  1. This is a marketing communication. The analysis is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
  2. Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
  3. Each of the Analysis is prepared by an independent analyst (Jens Klatt, Professional Trader and Analyst, hereinafter "Author") based on the Author's personal estimations.
  4. To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
  5. Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures that refer to any past performance is not a reliable indicator of future results.
  6. The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
  7. Any kind of previous or modelled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
  8. The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.
  9. Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, you should make sure that you understand all the risks.
Admirals An all-in-one solution for spending, investing, and managing your money

More than a broker, Admirals is a financial hub, offering a wide range of financial products and services. We make it possible to approach personal finance through an all-in-one solution for investing, spending, and managing money.