I’m Waving the Caution Flag

Once again, the entire stock market is getting “gamma-squeezed.” [Jeff Clark's Market Minute]( I’m Waving the Caution Flag By Jeff Clark, editor, Market Minute Once again, the entire stock market is getting “gamma-squeezed.” We’ve seen it happen on individual stocks before. Indeed, the entire meme stock craze in 2021 can be defined as a gamma-squeeze event. But, it’s really not supposed to happen with the broad stock market. Let me explain… Recommended Link [Gold Is Saying “Thank you!” to China]( [image]( China’s gold-buying activity has been gaining momentum recently. During the first quarter alone, the People’s Bank of China (PBoC) purchased 27 tonnes of the shiny rock. So, gold has definitely been saying “Thank you!” to China. However, we have [another industry in our crosshairs.]( While gold may be thanking China, this sector is currently thanking Elon Musk… As crazy as it sounds, artificial intelligence just got one step closer to ushering in “the next step in human evolution”… and minting new millionaires. And it’s all thanks to Musk’s [latest AI creation.]( [Click here to learn more about this strange, new device and the sector it’s going to be a catalyst for.]( -- Meme Stock Mania Let’s go back to the original meme stock mania of 2021. You remember that, don’t you? Back then, the Reddit-crowd of retail investors would buy far-out-of-the-money call options on stocks like GME, AMC, and BBBYQ. Market makers would willingly sell the options to the retail investors. They were happy to collect the premium. But in order to offset the risk of being short calls, the market makers would buy shares of the underlying stock – thereby making a “delta-neutral” trade, a trade that is not dependent on direction but profits as time passes and the option premiums decay. As more and more retail investors bought calls, market makers had to buy more stock in order to offset the risk of being short calls. This buying pressure – in the absence of natural sellers of the stocks – forced the stocks higher. The higher stock prices brought in more call buyers, which then forced market makers to buy more of the underlying stocks, which brought in even more call buyers – and on and on. This is a gamma-squeeze. And, it continues until folks stop buying call options and/or enough natural sellers of the stocks show up and pressure the price lower. Then it all unwinds in spectacular fashion. Gamestop (GME), for example, lost about 80% of its value in just one week in early February 2021. AMC Entertainment (AMC) dropped 70%. Bed Bath & Beyond (BBBYQ) lost 60%. Like I said, this happens on individual stocks all the time. It’s not supposed to happen with the broad stock market. But, that’s what’s happening. Meme Market Mania… Again It’s largely due to the existence of zero-day-to-expiration options on the major stock market indexes. These are options that expire on a daily basis. Trading in these contracts has increased the size and persistency of the daily moves in the indexes. Folks have been buying large amounts of daily out-of-the-money call options on the market indexes (SPX and QQQ mostly). Market makers who are selling those calls need to buy the stocks of the underlying indexes, or futures contracts on the indexes, in order to neutralize their short call positions. That buying pressure – in the absence of natural sellers – is pushing the indexes higher. This doesn’t happen if there is a bearish counter force. But, the bears have been run over so badly the past several weeks that no one is shorting. No one is selling. So, the market squeezes higher. Free Trading Resources Have you checked out Jeff's free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career – at zero cost to you. Just [click here]( to check it out. I’m Waving My Caution Flag How long can this keep going? I have no idea. All I know is that when it stops, the market will unwind in spectacular fashion. I wrote about this phenomenon [last July]( – just a few days before the broad stock market began a correction that would knock 12% off the S&P 500 over the next three months. Now, with the old meme stocks catching fire again this week, and with the major market indexes surging to new all-time highs, it feels right to start waving the caution flag again. Be careful out there. Best regards and good trading, [Signature] Jeff Clark [Jeff Clark's Market Minute]( Jeff Clark Trader 55 NE 5th Avenue, Delray Beach, FL 33483 [www.jeffclarktrader.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. Jeff Clark Trader welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. To contact Customer Service, call toll free Domestic/International: 1-800-752-0820, Mon–Fri, 9am–7pm ET, or email us [here](mailto:contactus@jeffclarktrader.com). © 2024 Omnia Research, LLC. All rights reserved. Any reproduction, copying, or redistribution of our content, in whole or in part, is prohibited without written permission from Omnia Research, LLC. [Privacy Policy]( | [Terms of Use](