The market has changed as volatility returns to Wall Street. The Nasdaq struggles, while trades in cryptocurrencies and gold lose their appeal. This uncertainty is partly due to the U.S. government possibly placing new restrictions on software exports to China, which increases trade tensions. The Federal Reserve faces challenges because of a lack of economic data during a government shutdown. ADP has stopped sharing payroll figures, leaving policymakers without much information. Nonetheless, corporate America is doing well, exceeding earnings expectations. Increased spending on AI and seasonal trends suggest a potential bull market may continue.

Tesla’s Third Quarter Results

In the third quarter, Tesla reported a 37% drop in profits, even though revenue rose by 12%. This points to underlying challenges. CEO Elon Musk’s wish for a large compensation package and more control contrasts with Tesla’s declining competitiveness, as newer models appear less attractive. Market momentum has slowed down, similar to past instabilities. Although the downturn isn’t chaotic, it marks a shift. Traders are experiencing real volatility as quant funds adjust their positions, affecting the Nasdaq and small-cap stocks. The sense of predictability is gone, altering market dynamics. With signs of an excess correction, the market is ready for rebalancing and recovery. Negative gamma, compared to a new gravity, shows the market is resetting, hinting at a potential renewal after the current correction. The market’s rhythm has changed, and the old strategy of buying every dip has become risky. For months, market makers handled shocks, but with negative gamma now dominant, they must sell during weakness and buy when the market is strong. This means even small price moves could have bigger impacts, suggesting that volatility may be the norm for the foreseeable future.

Traders Should Consider Volatility

Traders should think about buying volatility instead of just betting on which direction the market will go. The VIX index, which measures market fear, has jumped over 35% in the past week to above 22, although it is still below panic levels from early 2023. Purchasing call options on the VIX or cheap out-of-the-money puts on major indices like the Nasdaq 100 is now more than just a hedge; it’s a main strategy. The tech sector, especially software and semiconductors, faces imminent threats from renewed U.S.-China tensions. Momentum-focused ETFs have seen billions in outflows in just a few days as funds pull back their exposure to these previously strong market leaders. Buying put spreads on semiconductor ETFs could be a smart way to capitalize on this geopolitical uncertainty. With the Federal Reserve lacking official data, every minor economic report will likely lead to strong market reactions. Fed funds futures suggest almost an equal chance for a rate hike or cut at the next meeting, which shows a level of indecision not seen since the banking turmoil of 2023. This uncertainty means that instruments like straddles on interest-rate-sensitive stocks could provide opportunities for capturing sharp price shifts in either direction. Tesla exemplifies this new reality, where solid numbers counterbalance the hype. The implied volatility of its options has soared above 80%, as the market tries to account for risks from its CEO’s distractions and weakening sales. For traders, selling expensive call spreads during sharp rallies could be an effective strategy to profit from increased fear. We are witnessing a mechanical unwinding of leveraged positions, reminiscent of the deleveraging that shaped much of 2022. Systematic funds are programmed to lower risk when volatility rises, creating cycles that drive prices down. It’s important to acknowledge this trend, as it operates on algorithms rather than emotions. Assets like gold and Bitcoin, which should benefit from uncertainty, are instead trading like risk-on assets. They are failing to serve as safe havens, dropping alongside tech stocks and illustrating that in this early phase of deleveraging, all assets are being sold. Until they separate from other risk assets, they do not provide real portfolio protection. Now is not the time to make bold predictions about a market bottom but to adjust strategies tactically. The market is working through excess built up over the summer, a process that is disorderly and painful. Selling premium through covered calls or credit spreads during market rebounds might be the best way to navigate a situation where gravity has returned. Create your live VT Markets account and start trading now.

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