A trader made a huge win betting against Nvidia … today’s “casino-like” stock market … how Louis Navellier finds trades that benefit
Early Tuesday, a mystery trader bought 60,000 contracts of an option spread on AI-juggernaut Nvidia.
The wager appeared incredibly risky.
Nvidia’s stock price ascent this year has been virtually relentless. And yet, for this bet to be profitable, the trader needed Nvidia to fall from Tuesday’s price of roughly $126 to below $119 by today.
That’s a drop of almost 6% in only a handful of days – a seemingly absurd outcome based on the tech darling’s unyielding bullishness in 2024.
Well, the mystery trader didn’t need until today…
As Nvidia cratered on Wednesday, dropping 6.5% to fall below $119, about 58,000 units of the same spreads changed hands. While it’s impossible to determine if this was the same trader cashing out, it appears that way.
If so, this mystery trader walked away more than $6.5 million richer… in about 24 hours.
In Warren Buffett’s latest annual shareholder letter to Berkshire Hathaway investors, he highlighted the “casino-like” nature of today’s stock market
From Buffett:
For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young…
Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school.
Buffett’s business partner, Charlie Munger, shared the same perspective in an interview in 2022:
We have a liquid stock market which is two things at once — it’s a place for people who are doing long-term investment rationally to go and make their transactions, and it’s a place for another bunch of people to do casino gambling. We mix them up totally…
This sentiment from Buffett and Munger isn’t just an impression from two market veterans, it’s backed by data
The stock has always had its ebb and flow, but relentless, exaggerated volatility is a more recent phenomenon.
Last year, the research firm DataTrek published its research on the topic:
The S&P 500 has become noticeably more volatile over the last +60 years, but returns have not increased commensurately…
From 1958–1979, the standard deviation of daily returns was 0.72 percent. It rose to 0.89 percent from 1980 – 1989, and has been even higher since 2000, at 1.13 pct.
While Buffett left the reasons for this gambling (and heightened market volatility) undefined (“For whatever reasons…”), we think the explanation has at least one element that’s easily understood.
To walk through it, let’s investigate a chart together.
You’re about to see a comparison of the median income earned in 1985 relative to the average home price then. The chart will then compare that to the same metrics in 2022.
Income is light blue. Median home price is dark blue.
That increase — going from 3.5 years’ worth of income to 6.3 years’ worth of income — means homes are 80% more expensive for millennials than they were for their parents’ generation.
For homes to be as affordable as they were in 1985, the median household would need to earn $134,000 per year — nearly double the current median of $74,580.
It’s not just home prices that have become more expensive relative to median incomes
It feels like just about everything is eating up a greater portion of disposable income today.
To illustrate, let’s crudely compare “what you make” to “what you spend.” We’ll do this by evaluating the Estimate of Median Household Income to Personal Consumption Expenditures.
The chart below dates to 1985, and we’re indexing the data to enable comparison.
Please note that the Fed’s data for median income isn’t updated beyond 2022 but you can still get a sense for its trajectory.
Median income is in blue while expenditures are in red.
In short, “what you spend” has risen dramatically more than “what you make.”
Might this be a contributing factor to why many Americans are treating the stock market as a casino?
Without a casino-type windfall, the lifestyle that older generations took for granted is miles beyond reach for so many younger Americans today.
If you believe yesterday’s pathway to the American Dream of “work hard, save, and it will pay off” doesn’t work anymore, then gambling for the big windfall isn’t quite so crazy.
Here’s ABC News with a survey about the American Dream:
Barely more than a quarter of Americans say the American dream still holds true — about half as many as said so 13 years ago.
Defined as “if you work hard, you’ll get ahead,” just 27% in a new ABC News/Ipsos poll say the American dream still holds, down sharply from 50% when the question first was asked in 2010. Eighteen percent now say it never held true, up from 4%.
The rest, 52%, say the promise used to hold true but no longer does, up 9 points. Taken together, 69% say the American dream does not hold true today, up 22 points.
So, take this glum sentiment from younger Americans… throw in a pandemic and trillions of dollars’ worth of government helicopter money as a bankroll… add in commission-free trading with the online brokerages… include stories of everyday people making millions practically overnight from meme stocks like GameStop and AMC… and you have all the necessary ingredients for a stock market casino.
Legendary investor Louis Navellier has noticed this uptick in volatility in recent years
Here’s Louis:
For the past few decades, you could invest in a big, stable company and reliably see it grow 8% to 10% per year. That’s the way investing is supposed to work. But that’s not how it does anymore.
The reality is that over the past few years, our financial system has been distorted, causing our markets to undergo a massive shift…
Stocks are no longer climbing steadily like they have for decades. Instead, their gains are appearing in short, quick moves, which I like to call “Flash Trends.”
Louis explains that when he began to notice this change in the markets a few years ago, he set out to find the answer to the obvious, related question…
Is there a way to take advantage? Might there be a combination of factors that serve as a “tip off” that a massive Flash Trend is brewing?
Back to Louis:
After countless hours of research and crunching trillions of data points, I discovered eight “precursors” – including positive earnings revisions and sales growth – that indicate a Flash Trend is on its way in the very near term.
Louis has put together a free Flash Trends briefing on these precursors. In it, he tells you everything you need to know about his quantitative system, the eight precursors, and what this system is suggesting about the market looking ahead.
Coming at this from a different angle, in recent Digests, we’ve urged readers to bone up on their trading skills
Though we’re enjoying a strong bull market, there are growing reasons for concern out on the horizon. If you’re nearing, or in retirement, and don’t want your entire nest egg exposed to the potential for exaggerated volatility, we believe sniper-like trading could be an effective option.
Rather than a buy-and-hold approach that leaves you vulnerable to whatever the market does, trading offers a nimbler alternative – potentially sidestepping the worst of drawdowns, while taking advantage of sudden melt-ups – or, as Louis just called them, “Flash Trends.”
Again, to learn more about how this works within Louis’s system, you can watch his briefing here. You’ll also get a handful of stocks that are signaling the potential for flash trends right now.
Here’s Louis on that note:
In my briefing, I also share where you can find the four stocks my system targeted that are set to experience Flash Trends.
In each of these companies, we see all eight precursors aligned in the prime position. I believe any of these stocks has the potential to hand you 100% gains in the next six months.
Stepping back, no, it’s not in your head – stocks have become more volatile. And given current market and economic trends, it’s likely to continue.
But whereas this is problematic for jittery investors and/or buy-and-holders with a limited investment timeframe, volatility can be incredibly lucrative if you’re able to harness it.
That said, I wouldn’t recommend betting 60,000 options contracts against Nvidia…
Have a good evening, Jeff Remsburg
