September 6, 2020

Stocks rounded out the final week of summer by engaging in a 9.9% Nasdaq correction amid whispers of the identity of a gigantic buyer of call options said to have goosed the market higher in August. The action left a number of issues with upside reversal patterns as the long holiday weekend kicked off.

For several weeks it became apparent that a mysterious buyer of call options was largely the catalyst for August's gains. Some longtime options specialists had not heretofore seen such enormous buying of options. As it turned out, the buyer was Softbank, the Japanese powerhouse in technology, finance, and energy which runs the world's largest technology venture capital fund.

Softbank started off by taking giant stock positions in the technology glamours and then added the call option positions. Sellers of the call options who took the other side of the trades were forced to hedge their losing positions by buying massive amounts of stock.

This, combined with high levels of retail investor buying of calls and amid the quiet month of August, largely caused the ongoing rallies in the liquid glamours to take on a life of their own. Softbank is said to be sitting on $4B of unrealized gains.

The Nasdaq lagged the market in each of the last three days. Ditto for the IBD 50 ETF (FFTY), a growth stock proxy. This is not a surprise given the growth sector's leadership for this bull market.

The most attractive chart in our Watch List, which was whittled from 104 names on Wednesday to its current 69, is (JD). Unlike most others, JD did not touch the 20 ma, it closed up on Friday, and the close was in the 85th percentile of the day's range, i.e. a good close.

The chart above is shown for illustrative purposes only, since at this juncture fresh money buys in anything are not indicated. Were it not for the general market backdrop, JD would offer an attractive pullback setup. But when a market comes off 9.9% in only two days, it becomes something to respect and takes precedence over individual chart patterns. For those who want to dip their toe in the water, JD would be an option.

In sum, fresh money buys are off the table. It is important to have no opinion as to market direction from here. Open-mindedness, including the flexibility to re-initiate buys, is of paramount importance. Let's be patient and allow the market a chance to tell its own story.

Kevin Marder

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All stock charts created using MarketSmith unless otherwise noted. ©2020 MarketSmith, Incorporated. All other charts created using TradeStation. ©2001-2020 TradeStation Technologies. All rights reserved.

The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. Estimate data provided by FactSet. Expected earnings release dates provided by EarningsWhispers.