JPMorgan Blames Pace of Friday’s Stock Selloff on Levered ETFs

Core Viewpoint - The recent selloff in the stock market, exacerbated by a rush to exit levered exchange-traded funds (ETFs), represents the largest single-day decline since April, driven by geopolitical tensions and market dynamics [1][2]. Group 1: Market Dynamics - The S&P 500 Index experienced a decline of 2.7%, while the Nasdaq 100 fell by as much as 3.6% following a social media post from US President Donald Trump regarding potential new tariffs on China [1]. - A significant factor in the rapid selloff was the behavior of levered ETFs, which are designed to amplify the performance of their underlying indexes, leading to increased volatility as traders rushed to sell positions [2][4]. - On Friday, levered ETFs sold approximately $26 billion in equities to rebalance, contributing to the market closing at its lows for the day [4]. Group 2: Derivatives Market Impact - The selloff pushed derivatives market makers into a negative gamma state, where they are compelled to sell stocks during a downturn or buy during a rally, further intensifying market movements [3][4]. - The growth of derivatives trading, particularly among retail investors, has been linked to increased volatility in stock prices, with unexpected geopolitical events often triggering significant market swings [4]. Group 3: Recovery Potential - If the S&P 500 can recover to around the 6,663 level, it is expected that positive gamma conditions will return, stabilizing the market and making the recent selloff appear as a minor event [5]. - On Monday, stocks showed signs of recovery, with the S&P 500 rising by 1.5% to 6,652 and the Nasdaq 100 reaching 24,708, approaching the positive gamma threshold [5].