Is It Time To Be Concerned?

Follow @MrTopStep on Twitter and please share if you find our work valuable!

Every week, MrTopStep invites traders to an “Own the Close” contest where the closest guesstimate where the SPX will settle on Friday’s 4:00 cash close.

The winners get a free week's access to the MrTopStep Chat and trading tools. Enter your guess now!

Our View — Is It Time To Be Concerned? 

I have witnessed every major stock market crash since 1980, each with its own causes — from foreign currency collapses to the aftermath of 9/11, which coincided with my return from the Middle East. Some declines were prolonged, others brief. The 1987 crash stands out vividly; my S&P desk processed 600 filled orders and twice as many cancellations. We worked on the floor until 10:30 PM and returned by 7:30 AM Saturday morning. The NYSE and S&P (CME) bore the brunt of the selloff, losing $14 billion in stock value, devastating countless investors. Panic selling hit its peak with stocks left without buyers at any price. The Dow plummeted by 68.90 points in two days, a staggering 23.05% drop, blamed on S&P 500 index arbitrage and program trading — the pit's sole bid being a programmed one.

Fast forward to 1999, another phenomenon took hold — the tech bubble of 1999-2000. Viewing it from the trading floors was surreal and I thought this was doomed from the start; the tech stocks soared daily, culminating in trading rooms popping up nationwide. Most of these young traders were 19 to 23 years old either just getting out of college or mommy and daddy still paying for it. I remember it like it was yesterday, I would get on the elevator at 7:45-8:00 and as the door was closing a hand would pop in and there are 3 kids in sandals, shorts and puca beads, always talking loud about the money they were up buying worthless companies that the knew nothing about. It was almost everyday that an unheard of company got pumped up from $3 to $180 in a few days. I knew all this fast, free money would not last because at my S&P desk, we were counting the days until the crash — it was not a matter of 'if' but 'when' the Nasdaq would falter.

I don't know that this is the same thing as today, but in some ways it is. Instead of going into hundreds of tech names back then, today is very different... Everyone is piling into the same 7 to 15 names and they are more heavily placed on the tech side or the Nasdaq. Over the years there have been many times where a crash was telegraphed, meaning we knew it was coming. In 1987 it was Paul Tudor Jones that not only sold the shit out of the S&P futures (we did some of the orders) but he was telling people a crash was coming and the most notable and vocal person to call the 2000 tech bubble was Jeremy Grantham of GMO. 

One firm that has also stuck out and — we also did business for — was Mr. Black Swan himself, Nassim Nicholas Taleb, former options trader Taleb, and owner of Universal Investment. Taleb has been on CNBC for years calling for a crash and talking Black Swan events. His system loses money almost every day that only pays off during extreme volatile periods. A few calamities like the 2008 crisis, the 2015 Flash Crash and the Covid-19 market meltdown in 2020 have made enough for a stock investor with a small allocation to his fund to trounce a classically diversified 60/40 stock and bond portfolio. 

Now Universal’s Mark Spitznagel, who has made billions from past crashes, sees a severe market crash coming, saying “I think we’re on the way to something really, really bad—but of course I’d say that.” He sees a major selloff / crash with stocks potentially losing more than half of their value. He doesn’t think the decline will happen right away and says that as inflation falls, the Fed’s easing will fuel further gains, but said rate cuts are often the starting gun to the decline.

I know about this company, as they went through my desk. They put in these totally off-the-wall open options orders that were GTC (good till cancel), buying puts that you wouldn't think would ever get hit. We also had a prop trading firm that used the desk that did the same thing, I think the company's name was Infintium. I would look at the guys at the desk .10 cent bid for this or that on 2,000 lots and there were other orders being placed at other desks with different strikes. When they did get hit something very big was going on, like 9/11. The idea is similar to short premium sellers, they make tons of cash in a quiet market when the VIX and the ES aren’t moving, but when the shit hits the fan and the VIX blows up they wipe out their accounts. That's why clearing firms don't want the business.

In conclusion, we all know what we are up against. We all know how much the value of the US stock market has increased as the Fed raised rates and spent trillions of dollars doing it. We all knew zero rates were not sustainable just like we know the US debt isn't. I don't think it makes sense to sit around everyday waiting for a mega crash, but I do think there will be a time in the future when all of this stuff will come to roost. After all... nothing goes up for ever.