The Nasdaq has quickly shed over 10% in just the last 13 trading days and now flirts with technical corrective territory. Why are stocks selling off so aggressively and at what point will stocks find their footing?
From peak to trough, the /nq (Nasdaq 100 futures) has dumped 11.44% since the high on 2/18 (13 days) while the /es (S&P 500 futures) has lost over 7% in just the last 12. Both indexes closed well off of the lows today (Friday, 3/7/25) and managed to avoid closing above the -10% mark which keeps them from finishing the week in technical correction territory. However the speed at which asset prices have declined has been quite jarring to investors as there has not been a single real major catalyst for the move down.
We can get into secondary factors like valuations, seasonality, and options market weakness but in short, the reasons for the decline can be summed up into a few key points.
1) The Trump administration's wildly unpredictable nature. The market hates uncertainty more than it hates negativity and the constant flip flopping on tariffs and other major policies is stressing out both traders and investors alike, causing 100+ point intraday swings to be to a part of the current norm.
2) Rest of the world (RoW) has been aggressively cutting rates thus supporting their financial markets as well as driving up domestic bond yields to absurdly juicy levels. This is causing some money to rotate into foreign markets such as the CSI 300, Hang Seng Index, and the German DAX.
3) Mega cap tech concentration risk. Stocks like NVDA, META, and co. have seen meteoric rises, and the former is now a top 3 weighting in both the NDX and S&P 500, as well as a major Dow component. The indexes are extremely heavy at the top and any profit taking on these behemoths will cause the entire index to lose market cap, even if the majority of the other components aren't selling.
4) The Yen carry trade. I wrote about this just last week, but and unwind there can cause a serious de-leveraging event, much like what we saw in August which to be fair, has already been partially unwound.
Noticing these risks on February 20th, (namely the carry trade) I warned clients as well as the public that there was left tail risk in the market and immediate action should be taken to de-risk and/or hedge for a coming decline that could last well into late March -
We've now since hit my technical target on the SPY (S&P 500 ETF) of 565 although admittedly I did not anticipate it to hit so fast. In fact, last Friday I called for a technical bounce that would result in a lower high and set up the sell action into that target area. Instead of doing that we simply sold off in a straight line all week long until late this morning when SPY made a low of $565.63 before rallying hard into the end of the day.
Now, as mentioned before the Nasdaq has taken the brunt of it due to concentration risk and de-leveraging - "tech wreck" as some like to call it. However the nature of this de-risking has been unusually fast and when compared to other sharp selloffs in recent memory this one in particular strikes me as something that is now way overdone, at the very least in the near term.
Let's compare -
Here we can see the current sell measured up against the August swoon. In August /nq sold off nearly 17% in just 17 trading days before a massive V shape to new highs on the back of the initial carry trade unwind and leveraged short vol de-risking. On this selloff we've seen an 11.44% decline in 13 trading days. Here's the kicker - during the August selloff we saw not one but two multi-day rally attempts that saw lower highs before the larger drop occurred into the lows.
Let's use another, more extreme example -
In the infamous 2020 crash the /nq dropped a whopping 14% in just 6 sessions with no bounces. It then proceeded to retrace nearly 10% in just 3 days before the ultimate collapse.
The point here is that even with these two other volatility events, there were vicious bounces before the majority of the downside occurred. Unless I am mistaken we aren't about to have 40% the economy immediately shut down like we did in 2020, and while the carry trade is a risk among other things, much of that has already unwound unlike this past August. I bring this up because this straight line selling we've seen is absent of any an attempt at a technical reset, or even a bear flag. In other words, sellers are not waiting for the natural ebb and flow of the market in order to pile in with shorts, they are essentially selling anything and everything with panic, a "sell at any price" mentality. There are a few data points that confirm this. credit - https://x.com/Barchart
This shows us that hedge funds are in panic mode and willing to sell at any price. The options market is also showing similar signs of traders piling into hedges and long put positions-
Dealers are taking on well over 2.5 puts to every 1 call and nearly THREE puts to every one call a few of those days. For reference, the general norm is usually somewhere around .80 - 1.2. I have never seen it above 2 to 1 for more than 1-2 days at a time and the times that I have it happen it marked a reversal with in 1-3 days after. We are now on FIVE out of the last six days at 2.4 or higher, 2 of which nearly touched 3.0 at one point intraday. This is an insane level of skew.
In conclusion, there are certainly risks in this market and by no means am I saying we have the all clear or that bulls are out of the woods, but the nature of this selling may be setting us up for bear market's twin brother - the short squeeze. In combination with the market's positioning shown above, the technical 565 target being satisfied, and many oversold conditions, it is likely that this leg of the correction is in the 8th or 9th inning, and traders should soon expect a sustained technical bounce. That said, the big question remains - is there is another shoe to drop later in the month? We'll talk about that another time. 😉 🔐For access to premium trading content including swing trade alerts & live day trading room visit 👉 - https://www.carnivoretrades.com/
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The theories I've read about a final blow-top might hold some weight if it's also being propelled by the absurd number of shorts piling up. I'm not saying this article specifically endorses that theory, but I personally see some overlap. Outstanding work, as always.
Awesome as always!
If the ROW is cutting rates, wouldn't that mean their bond yields are less attractive? If the rates were really high, I could see why people would buy them and want that currency, but then their stock markets would presumably be lower.