Amazon’s Very Bad Day And McElligott On Friday’s Selloff

A very bad month for US equities closed on a decidedly dour note Friday, when stocks careened nearly 4% lower in one of the most painful single-session routs since March of 2020.

April was already poised to be the worst month for Wall Street since the onset of the pandemic, so Friday’s gratuitous bloodletting was just insult to injury.

The Nasdaq notched its largest monthly decline since the financial crisis (simple figure below).

Considering Lehman was (checks watch) almost 14 years ago, April’s 13.4% drop counted as the biggest one-month NDX selloff some folks on the Street have ever witnessed as adults.

Amazon had its worst day since 2006 (figure below) as investors chafed at the company’s lackluster guidance and cringed at the prospect of consecutive quarters of single-digit top line growth.

The stock is a “top-5 ‘placeholder long’ position for the entire global equities manager universe,” Nomura’s Charlie McElligott wrote, in a Friday afternoon note.

The plunge illustrated so poignantly by the simple chart wiped out more $200 billion in market value.

For context, Amazon’s Friday collapse was the second-largest one-day value destruction event in US history, behind only Facebook’s existential implosion earlier this year.

Amusingly, Amazon also ranks second on the list of largest one-day value creation events. The company’s February 4 rally was worth $191 billion (figure below).

Note that Netflix’s post-earnings collapse made the list too.

Long story short (no pun intended), when mega-cap US tech tumbles, the knock-on impact for the “broader” market can be dramatic precisely because the “broad” market isn’t all that broad. US equities live and die by a handful of names, and those names are in the firing line.

“The mechanical flows matter, but as far as get[ting] the macro ball rolling, there’s no doubt in my mind” that mega-cap FANG+ is part of the story, McElligott went on to say.

Five-day realized vol on the Nasdaq is up to 60 (figure above). “The mega-cap tech ‘generals’ are being executed one by one,” Charlie wrote.

To be sure, there was a flows story. Early in the session, McElligott said 4270 on S&P futures was a key pivot level. The Street was short 9100x Put at that strike which expired Friday. It was one leg of a monthly put spread collar program, Charlie said, noting that it “obviously lost delta into [Thursday’s] booming rally and was clearly a large part of the ‘short gamma’ scramble and hedging squeeze higher.” Here’s what happened on Friday, as narrated by McElligott just before the closing bell:

The Put Spread Collar I mentioned this morning was re-struck around 3pm — so the today 4270 Puts are deep in the money now, and Dealers have since had to sell ~$3B of futures since yday’s highs, as we’ve slipped and then accelerated lower, in order to stay hedged.

Well, the new trade is SPX 29Jul 3320 / 3940 / 4385 PS Collar 12,700 x’s (Put Spread over), so the customer bot 4k SPX today 4000 Calls to offset this immediate “negative Delta” impact of the June hedge. BUT… the Call settles into Cash on today’s close, so the Dealer needs to short ~$3B in futures on the bell to replace it.

Toss in nearly $11 billion in projected rebalancing flows for leveraged ETFs (for sale, obviously) into the close, and you’re left with smoldering wreckage or, if you’re a mainstream financial news outlet, recycled pictures of concerned traders staring blankly at monitors with their hands over their mouths.

“The end of QE means the volatility anchor is gone,” BofA’s Michael Hartnett said, calling that “the biggest story of 2022.”

We’re just four months into the year and things have already gone awry. I suppose you could argue that suggests the worst may be over — that stocks pulled forward the impact of balance sheet runoff and policy tightening. Hartnett sounded skeptical, though. “Asset price carnage has occurred before QT, and there’s lots of QE to unwind,” he remarked.