Goldman Sachs: Trading Desk 07/24/2024

S&P -231bps closing at 5427 with a MOC (Market On Close) of $800B to buy. NDX -365bps at 19032, R2K -209bps at 2196 and Dow -125bps at 39583. 12.8B shares were traded across all US equity markets vs. YTD (Year to Date) daily average of 11.5B shares. VIX +2276bps at 18.07, Crude Oil +66bps at 77.47, 10Y Yields +3bps at 4.28, Gold -44bps at 2399, DXY -7bps at 104.38 and Bitcoin -7bps at 65806.

The S&P 500 snapped a 356-day streak without a 2% (or greater) drop – the longest streak since 2007 with 943 days without a >2% drop. The SPX fell -2.3% (worst day since Dec ‘22), the NDX fell -3.7% (worst session since Oct ‘22), the “Magnificent Seven” fell -6% (worst session since Nov ‘22), AI winners fell between -5% and -10%, and index volatility rose (VIX >18 for the first time since April).

Today had a different feel and could be the start of an extended decline from here. Flows pointed less towards “raw reduction” from HFs (Hedge Funds) which was the main feature of flows last week, with GS PB noting the largest period of raw reduction since early ’31) and more towards aggressive length reduction, specifically from the LO community. On our desk, most of the supply was concentrated in YTD AI gainers (including NVDA, AVGO, ANET, DELL, etc.).

While it’s hard to assign a definitive reason for the price action, most settled for a combination of: 1) Disappointing results vs. high expectations at GOOGL (-5%) and TSLA (-12%); 2) Lack of expectation for incremental AI spending from GOOG/TSLA (i.e. CapEx guidance not raised) + declining order growth from VRT (stock ended -13%), which seemed to weigh on AI infrastructure plays overall (NVDA -7% / AVGO -7.5% / DELL -8%); 3) and continued stalling tech momentum following strong rotational pressure over the past ~2 weeks. (h/t Bartlett)

Questions about “consumer health” are increasing sharply from our clients, given the rise in those talking about weakness. Some new companies are pointing out problems that were not mentioned before (Visa), higher-revenue names (LVMH) are starting to talk about a slowdown, and the original company that warned about the consumer (LW) is saying this will continue into 2025.

Our floor was at a 6 on a scale of 1-10 in terms of overall activity levels. Flow executed on our desk ended with a -12% selling bias today. LOs ended -30% better for selling at a significant notional (-$7B) as we saw increased group activity this afternoon. LO bidding was mostly concentrated in Technology, Discretionary, and Healthcare. The only 2 sectors net bought by the group were Macro and Materials. HFs ended up being just -2% net sellers (-$350M) led by Industrials and Technology. HFs covered areas in Discretionary.

AFTER THE CLOSING: TMT EPS moved mostly better with NOW +7%, IBM +3%, KLAC +3%. Consumer not so much… CMG unchanged (faded from an initial pop of +8%), seems due to the comment that June comp settled in at around +6% and July is similar to that. F -12%: EBIT/EPS missed expectations and isn’t great compared to GM’s results yesterday, while the broader auto space was heavy today on EV/China competition (TSLA -12%) and talk of cycle peak. LVS -3%: Expectations were low due to Macau. Ended up being a good reason for concern as they missed a pretty low bar. Direction (miss) won’t be a surprise, but it’s hard to see anyone rushing to own the name until they see some stabilization in Macau.

DERIVATIVES: Exciting day so far, the market dramatically outperforming the downside straddle after GOOG and TSLA disappointed on earnings. The gamma picture for dealers had cleaned up considerably and we are now seeing what that freer world may look like to move around in. The desk would estimate dealers are only long 2/10ths here from a gamma perspective and turn short on down another percentage. Vols are starting to work here a bit and the desk thinks the bias may play out going forward, particularly as we sell through the CTA triggers on SPX.

The story from a delta perspective continues to be more of a reduction in thickness than in network with RUT barely moving on the day and even RSP down just 40 basis points. It is interesting to note that on the year, NDX has only outperformed RTY by 3.5% after the recent pullback. Another sign of the pain of the RUT/NDX pullback is that RUT volatility is dramatically higher on the day despite the low move made. Some or most of that is due to spot outperformance vs SPX, but it is still a bit shocking to see an index that has a 24 handle for a month vol go over 1 vol bid on what is essentially a flat day.

Flows were somewhat mixed, but fairly active. Generally, we've seen put spread breakouts that net-sell vol and buy skew. We've also seen call spread buyers and outright calls. Tellingly, despite all these bullish structures, we haven't seen a significant pop in delta. We like long skew trades here and we like holding SPX options over other indices. (h/t Joe Clyne)