What a Short Strange Trip It’s Been

Articles From: Interactive Brokers
Website: Interactive Brokers

By:

Chief Strategist

Interactive Brokers

Some weeks go slowly, others speed along.  This week was the latter.  There was something noteworthy in almost every sector of the markets and we had the ups and downs to prove it.  Space and deadlines don’t permit a full recap of all the week’s activities, but we can rely on charts to do much of the talking.

On Wednesday, we featured a chart of the normalized month-to-date performance of 4 major US equity indices.  They were all underwater at the time, yet even after some solid gains, most have still not recovered any potential “sell in May” levels:

Normalized Month-to-Date Performance for Various Major Indices: S&P 500 (white), NASDAQ 100 (blue), Dow Jones (purple), Russell 2000 (red)

Normalized Month-to-Date Performance for Various Major Indices

Source: Bloomberg

Even after a day and a half of solid rallies, we see that all the indices above are still down for the week, and only the Dow Jones is up marginally for the month to date.  Those who bought the dip on Wednesday have been rewarded so far, though.  In that same Wednesday article, we outlined a potential reason for some added pressure on the market this week – taxes:

“Because May 17th is this coming Monday, today [Wednesday] is the final day for investors who sell shares for regular delivery (T+2) to receive the proceeds in their accounts prior to tax day.”

It was clear that the surprisingly high CPI reading that was released on Wednesday morning was the main culprit for the sharp selloff that we saw that day, I strongly believe that tax selling added to the day’s woes.  I believe that taxes also explain much of the ferocity of the snapback rally that began yesterday and continues through today.  Yesterday’s PPI release continued the theme of higher than expected inflation, but stocks were able to propel themselves forward without the somewhat forced selling by investors who needed to liquidate stock holdings to raise money for tax payments.

The progression of the VIX futures curve over the course of the week shows the remarkable round-trip in sentiment:

VIX Futures Curves Each Day This Week

VIX Futures Curves Each Day This Week

Source: Bloomberg

The VIX curve for today (green) is almost identical to the one from Monday (white).  Yet the progression is quite spectacular.  Look at the graph from Monday (white) to Tuesday (red) to Wednesday (blue).  That is a staggeringly quick move in just 2 days!  Then, we gave it all back between Thurday (orange) and today (green).  Volatility traders found themselves with excellent opportunities and hedgers were reminded of the value that could arise from their protection.  But those traders and hedgers needed to be quite nimble, because of the quick reversion of the volatility markets to their previous state.

Finally, any discussion of the week that was would be incomplete without mentioning bitcoin.  Cryptocurrency holders were shocked on Wednesday evening (US time) when Tesla (TSLA) announced that it would no longer be accepting bitcoin as a method of payment for its vehicles.  Bitcoin dropped sharply in the aftermath and has recovered some of its worst losses, but it still remains well below levels from prior to TSLA’s announcement:

Bitcoin 3 Day Chart

Bitcoin 3 Day Chart

Source: Bloomberg

The stated reason for the company’s change was concern over the environmental cost of bitcoin.  I remain surprised that market commentators take Elon Musk at face value.  Yesterday, I wrote:

“I find it unimaginable that he [Elon Musk] suddenly discovered that bitcoin mining was a huge energy hog.  …[The acceptance of bitcoin for purchases] could be creating an inadvertent anti-money-laundering (AML) problem for TSLA.”

I reiterate that I do not accuse TSLA or Musk of facilitating money laundering.  Instead, I assert that accepting bitcoin as payment for autos could accidentally facilitate the reintroduction of illicit funds into the financial system.  There appears to be a greater regulatory impetus around cryptocurrencies – as evidenced by yesterday afternoon’s news report that the cryptocurrency exchange Binance was under investigation by the Justice Department and IRS.  Elon Musk and Tesla remain huge holders of cryptocurrencies.  Offering an environmental rationale for a change in a corporate crypto policy is far more benign than a regulatory rationale.

Dear readers, enjoy the weekend.  Next week is a monthly options expiration.  After a wild week in equity, volatility and crypto markets, there is ample potential for another wacky one.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

Disclosure: Tax-Related Items (Circular 230 Notice)

The information in this material is provided for informational purposes only and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.

Disclosure: Options Trading

Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges. For more information read the “Characteristics and Risks of Standardized Options” also known as the options disclosure document (ODD) or visit ibkr.com/occ

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.