The selloff that is sending shares in the Nasdaq 100 Index to the wildest swings since Europe’s debt crisis is failing to stir equal panic in option prices. That bothers Bruce Bittles.
“They’ll have to show a lot of pessimism before this decline is over,” said Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion. “It certainly looks like this correction could carry on.”
Losses of 5 percent or more from Facebook Inc. to Tesla Motors Inc. and Netflix Inc. drove the Nasdaq 100 down 3.1 percent yesterday, the worst retreat in two years. During April, the gauge has moved 1.5 percent a day on average, the most since November 2011. At the same time, prices for options are below levels from February and October.
Concern earnings growth is slowing, valuations are stretched and that speculators got too bullish has erased $700 billion from the value of American equities in the past week. Losses that began in shares with the biggest gains have spread to the broader market, where the Standard & Poor’s 500 Index (SPX) reached a record on April 2.
“These things feed on themselves,” said Tom Caldwell, chief executive officer of Caldwell Securities Ltd. The Toronto-based firm manages about C$1 billion. “We had a good run last year and everybody thought they were smart again, which is always lethal.”
Only one company in the Nasdaq 100, logistics firm C.H. Robinson Worldwide Inc., advanced yesterday, making the rout the broadest since 2012. The losses are coming after the index soared 35 percent last year and reached a 13-year high in March. The gauge has lost 2.9 percent this year.
A measure of option prices on the Nasdaq 100 is lower compared with past selloffs, a sign of less demand to protect stock holdings from future losses. While the Chicago Board Options Exchange NDX Volatility Index jumped 16 percent to 20.59 yesterday, it’s still below the five-year average of 21.47, data compiled by Bloomberg show.
In October, concern a deadlock among U.S. lawmakers over the debt limit could lead to a government default fueled demand for hedging, driving the Nasdaq VIX (VIX) to a nine-month high of 22.07. Almost four months later, the measure climbed 13 percent on Feb. 3, approaching that level as data showed U.S. manufacturing cooled at the start of the year along with the weather.
It’s too soon since the S&P 500 reached a record to declare the end of the bull market, according to Douglas Ramsey, the Minneapolis-based chief investment officer at Leuthold Group LLC. He cited the all-time high in the Dow Jones Transportation Average as an indicator of strength.
“This may be part of a topping process where you just have a couple shakeouts at high flyers,” Ramsey said in a phone interview. The firm oversees $1.6 billion. “It’d be just very unusual that you had all that stuff top at the same time and it would be the end of the bull market.”
While almost every stock fell yesterday, measures of market breadth suggest losses won’t spiral, according to Ramsey. The cumulative advance-decline line for stocks listed on the New York Stock Exchange, which represents the number of daily gains minus the number of declines, also hit a record April 2.
For Brad McMillan, the chief investment officer for Commonwealth Financial Network, the market has further to fall. The CBOE Volatility Index, known as the VIX and often called a fear gauge for U.S. stocks, had the biggest jump in two months, climbing 15 percent to 15.89. Europe’s VStoxx Index gained 6.4 percent to 18.35 at 9:18 a.m. in London today.
More than half of the companies in the S&P 500 are reporting earnings in the next two weeks, which may add to market swings. Bed Bath & Beyond Inc. lost 6.2 percent after predicting quarterly profit below estimates.
Profit for members of the S&P 500 probably climbed 1 percent in the first quarter, analysts now forecast, after anticipating a 6.6 percent rise in January, data compiled by Bloomberg show.
The Nasdaq Composite (CCMP) trades at 35 times reported earnings of the companies in the index. That’s twice the ratio for the S&P 500, which trades at 17 times earnings.
“Markets are always about fear and greed and all of a sudden, fear is taking center stage,” McMillan said by phone. Waltham, Massachusetts-based Commonwealth Financial manages about $86 billion. “The path of least resistance is down.”
An investor paid $5.3 million betting on further declines in the iShares Russell 2000 ETF (IWM:US) yesterday, according to Trade Alert LLC. About 40,000 bearish contracts were bought on the small-cap stock ETF expiring in May with a strike price of $113, while the same number of May $107 puts were sold.
The strategy known as a put spread will be profitable if the ETF falls to $111.67. It will reap the maximum payout if the shares drop to $107. The ETF closed at $111.96.
Declines over the last week have come amid a backdrop of losses for hedge funds, some of which invested heavily in technology shares that fell in the first quarter. Paul Tudor Jones, Michael Novogratz and Louis Bacon, managers that profited last year from bets on macroeconomic trends, posted losses in the year’s first three months. Investors speculated others are probably selling now.
“What we’re seeing is pretty extreme for profit-taking,” Randall Warren, who manages more than $100 million as chief investment officer of Warren Financial Service in Exton, Pennsylvania, said by phone. “Somebody wants out of this market. Somebody has a lot of money and they want out at any price.”
One facet of hedge fund behavior suggests the low volatility that has prevailed since the start of 2013 is coming to an end, according to an April 2 research note from Societe Generale SA. Short positions in the VIX have been “completely abandoned,” strategists led by Alain Bokobza wrote.
“Somewhat lower levels of volatility recently, combined with a risk of a spike in volatility due to geopolitical tensions with Russia, are likely to have an influence, but alone do not explain the trend,” they wrote. “Hence our conclusion that the period of low volatility is coming to an end.”
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