The market experienced a shift as volatility returned to Wall Street, causing the Nasdaq to struggle and trades in cryptocurrencies and gold to lose lustre. The uncertainty stemmed from the U.S. government considering new restrictions on software exports to China, contributing to trade tensions.

The Federal Reserve was left in a precarious position due to a lack of economic data amid a government shutdown. ADP halted sharing payroll figures with the Fed, leaving policymakers with limited information. Despite this, corporate America exceeded earnings expectations, with AI spending and seasonal flows indicating a potentially enduring bull market.

Tesla’s Third Quarter Results

Tesla’s third-quarter results showed a 37% drop in profits, despite a 12% revenue increase, highlighting underlying challenges. CEO Elon Musk’s aspirations for a substantial compensation package and control are at odds with Tesla’s diminished edge, as newer models seem less appealing.

Momentum in markets unwound, reminiscent of past instabilities. The momentum downturn, though not chaotic, signalled a shift. Traders experienced real volatility as quant funds adjusted positions, and the Nasdaq along with small caps felt the impact. The notion of predictability was disrupted as market dynamics changed.

With signs of excess correction, the market was poised for rebalancing and recovery. Negative gamma, likened to a new gravity, indicated a market resetting phase, hinting at a renewal after the current correction process.

The rhythm has changed, and the old strategy of buying every dip is now a trap. For months, market makers absorbed shocks, but with negative gamma taking over, they are now forced to sell into weakness and buy into strength. This means that small moves will get bigger, and we should expect volatility to be the new normal for a while.

Traders Should Consider Volatility

Traders should consider buying volatility rather than betting on direction alone. The VIX index, a key measure of market fear, has surged over 35% in the past week to trade above 22, yet it remains below the panic levels seen in early 2023. Buying call options on the VIX or purchasing cheap, out-of-the-money puts on major indices like the Nasdaq 100 is no longer just a hedge; it is a primary strategy.

The tech sector, especially software and semiconductors, is facing a direct threat from renewed US-China tensions. We’ve seen momentum-focused ETFs suffer billions in outflows over just a few days as funds degross their exposure to these former market leaders. Buying put spreads on semiconductor ETFs may offer a calculated way to profit from this specific geopolitical uncertainty.

With the Federal Reserve flying blind without official data, every minor economic report will now trigger oversized reactions. Fed funds futures are pricing in a nearly equal chance of a rate hike or cut at the next meeting, a level of indecision we have not witnessed since the banking turmoil of 2023. This uncertainty makes instruments like straddles on interest-rate-sensitive stocks a viable play for capturing sharp moves in either direction.

Tesla is a perfect example of this new reality, where narrative has been crushed by numbers. Implied volatility on its options has skyrocketed past 80%, as the market tries to price the risk of its CEO’s distracting demands and weakening sales. For traders, this makes selling expensive call spreads against any sharp rallies a compelling way to collect premium from the heightened fear.

We are seeing the mechanical unwinding of leveraged positions, which feels like a smaller echo of the deleveraging that defined much of 2022. Systematic funds are programmed to reduce risk as volatility rises, creating a feedback loop that pushes prices lower. We must respect this flow, as it is driven by algorithms, not emotion.

Assets like gold and Bitcoin, which should be thriving on this uncertainty, are instead trading like risk-on proxies. They have failed to act as safe havens, falling alongside tech stocks and showing that in this initial phase of deleveraging, everything gets sold. Until they decouple, they offer no real portfolio protection.

This is not a time for heroic calls on a market bottom, but for tactical adjustments. The market is working to purge the excess that built up over the summer, and that process is painful and chaotic. Selling premium through covered calls or credit spreads on bounces may be the smartest way to navigate a market where gravity has finally returned.

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