Nasdaq 100 Rebalance And Options Expiration

Key Takeaways

• Tech Stock Show Some Vulnerability
• Oil Moving Higher
• Redistribution Of Weightings In Tech Index

Maybe you remember that high school physics lesson about an object in motion stays in motion unless it meets an equal and opposite force. Well, Thursday was that equal and opposite force. Earnings from Tesla
TSLA
and Netflix
NFLX
, released Wednesday after the close, disappointed investors and sent stocks sharply lower. The S&P 500 fell 0.7% while the Nasdaq Composite dropped over 2%.

Earnings can be an interesting phenomenon because you never quite know what the market will latch onto. In the case of Tesla, the company beat on revenue and profits; however, they didn’t increase delivery expectations. Elon Musk also said it’s possible the company will make further price cuts as the company seeks to grab more market share, though none were actually announced for now. The news sent shares of Tesla down nearly 10% to close out the day at $262.90.

Meantime, shares of Netflix fell 8% as revenues missed forecasts and guidance for third quarter revenues were below what analysts expected. However, new subscriber growth came in at 5.89 million which was well ahead of the 2.1 million forecast. Netflix began cracking down on password sharing earlier this year and also began offering a lower priced subscription tier which includes ads. Netflix shares fell nearly 8% on Thursday.

Taking a look at the larger macroeconomic situation, the Federal Reserve Open Market Committee (FOMC) is scheduled to meet next week. Currently, there is an almost 100% certainty the Fed will raise interest rates by a quarter-point. Beyond that, forecasts for what will happen next become a bit murky; however, currently it is expected the Fed will leave rates unchanged in September with a higher potential of a rate increase in November. Of course, what the Fed does beyond next week will largely depend on economic data between now and then. Included in that consideration set will be commodity prices, where crude oil is looking to close higher for the fourth consecutive week. If there is one commodity or one catalyst that can quickly set off inflation, it’s oil. In premarket, oil is trading just under $77 a barrel.

If you’re looking to further read the inflation tea leaves, another area to keep an eye on is home sales. Yesterday, it was reported that existing home sales fell to their lowest level since January. A lack of supply and higher interest rates are slowing the market and that could have longer term implications with respect to inflation. Consumers tend to spend more aggressively when the housing market is strong and cut back on spending when the market slows. This is something I’ll be monitoring as we move forward.

An interesting event is taking place today which could add some volatility to the market. The Nasdaq 100 will have an unscheduled rebalance. Typically, the index rebalances once a year; however, there are provisions in place that allow for a one-off rebalancing in the event the index becomes disproportionately concentrated in just a handful of stocks. Given the astronomical gains we’ve seen in some stocks this year, a rebalance will take place to cut the weight of those stocks. Initially, Apple
AAPL
, (Google
GOOG
parent) Alphabet, Amazon
AMZN
, Microsoft and Nvidia were set to see their weightings cut. However, this morning, the Nasdaq also added Facebook parent, Meta, to that list.

While most funds tracking the Nasdaq 100 have already made adjustments to be in line with the new weightings, today’s rebalance happens to fall on options expiration day. How that might affect today’s trading is difficult to predict; however, it does offer an added source of potential volatility. Currently, VIX is well below 14 in premarket trading, but as I’ve mentioned before, when volatility is this low, a seemingly innocuous event can have a disproportionate effect.

For today, I’ll be watching volatility closely. Next week is when earnings season really kicks into high gear with Alphabet and Microsoft
MSFT
highlighting a big week of reporting. As things stand, the market seems unconcerned about earnings; however, we saw on Thursday how the low volatility environment can sometimes lull the market into complacency before making a big move. Therefore, as always, I would stick with your investing plans and long term objectives.

Finally, I will be out next week and enjoying a little time off. I’ll be back the following week.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.