CoreWeave’s rout spurs record retail buying

Some weekend jitters that saw a host of tech stocks tumble Saturday evening on Hyperliquid turned out to be a case of markets being more hyper than liquid.

S&P 500 and Nasdaq 100 futures are kicking off the week on a strong note, with tech leading the way after last week’s drubbing.

Robinhood traders have been accumulating during the past two weeks as the benchmark index set and then retreated from all-time highs, with 10 session net purchases at a record:

At the lows, the S&P 500’s max decline on Friday was only marginally worse than Wednesday, but volatility was much jumpier. The VIX had a peak increase of 5.9 points in the final trading session of the week, compared to an advance of just 2.2 points at its highs of the hump day.

As we discussed, VIX activity had been pointing to some creeping equity concern ahead of this event, with the put/call ratio sinking to multi-year lows in early October. Open interest in VIX calls also hit its highest level since August 2024 — the month that featured the most anomalous vol spike of my career. And it’s that kind of positioning that could have helped accentuate the outsized jump in vol relative to the stock selloff.

“It could be the case that dealers hedging Oct VIX calls that they were short might have exacerbated the move,” tweeted Dean Curnutt, host of the Alpha Exchange podcast and CEO of Macro Risk Advisors. “I can say with certainty that dealers are short a substantial amount of these. they are short ‘VIX gamma’ --> they are short calls, long VIX futures and forced to aggressively buy VIX futures as the Oct VIX future rises and the delta on the calls they are short quickly rises.”

CoreWeave was in the crosshairs last week, losing a quarter of its value. Amid the rout, Robinhood’s retail traders rushed to buy the name with open arms and the stock saw its biggest week of net purchases on record.

The neocloud was also the third-most purchased single security on Robinhood on Friday, trailing only Tesla and SpaceX —whose CEO Elon Musk heaped some gasoline on credit fire fears last week by replying to a tweet of yields on CoreWeave’s 2031 bonds with “yikes.”

As a subsidiary of Robinhood, Sherwood Media is restricted from writing about any company in which Robinhood is or was a selling group member of the IPO during the regulatory "quiet period" for that company.

On the margin…

Higher interest rates are supposed to hit marginal activity.

The neoclouds were arguably the last obvious rate sensitive domino to fall. Utilities, REITs, consumer finance, housing, and even retail generally all got clobbered as Treasury yields headed skyward.

Neos are poised for a bounce on Monday, with the group shaking off some potential tape bombs in the process. Data center developer Nscale is reportedly facing pressure from investors to lower its IPO valuation ambitions from about $30 billion to between $16 billion to $19 billion. And the company confirmed reports that Microsoft has withdrawn from a UK deal.

(To be clear, this isn’t Microsoft walking away from a data center because it doesn’t want a data center. It’s Microsoft walking away because it doesn’t want a powerless husk of a data center.)

For AI bulls, the bad news is that forgone data center projects might become more the rule than the exception. Earlier this year, analysts at Bernstein estimated that only one third of North American data center pipeline projects in the works will be completed.

Does that mean AI demand is poor? No. It means execution risk is very real. That, in turn, can prevent demand from being realized and potentially inhibit future purchases. As such, you see things like the TeraWulf CEO making the public case for why his company is different and has its operational ducks in a row:

On net, we could probably say that concerns about how marginal players will fare amid higher rates (along with a big dollop of Anthropic-induced worries on there too) have done more harm to the AI hardware cohort than the popular reaction to Meta’s Muse did good.

“The whole deal here is that companies like OpenAI are spending unfathomable amounts of money to earn unknown amounts of future revenue. In the interim, there is an uncomfortable year or two where everyone either has faith, or they do not,” writes Brent Donnelly, president of Spectra Markets. “If everyone has faith, the issuers keep issuing and keep crowding out the rest of the economy. If some believers start to lose faith, there is a risk of an air pocket. Welcome to the air pocket.”

But this week may be less about the marginal and more about the maximal, central, and core players in AI, with earnings headlined by Meta.

The near-term question for the AI trade (and therefore markets) is whether the positive impact from Muse uptake (and cloud growth) on Mag 7 hyperscaler capex budgets overwhelms any presumptive constraints on outlays from the more leveraged/higher cash burn spots of bother. In short, will the AI boom be undone at the margins or saved at the maxes?

Recent funding and frontier lab concerns are potential wrenches thrown in that could dent confidence in near-term demand. But even if we were to clear those hurdles, we’re still looking at a market that’s thinking three years down the road when ascribing valuations to these stocks.

“AI leaders NVDA, AVGO, and MU trade at ~13x forward PE on average, within the 10x -20x range Cisco traded at after the internet bubble burst,” writes BofA analyst Vivek Arya. “Investors are paying post-crash multiples for a cycle that hasn't crashed.”

How these key names behave technically matters. Only one — Nvidia – has hit an all-time high in the second half of this year. Broadcom’s below the “Leopold lows” for the AI trade. Micron, meanwhile, is in no-man’s land.

It’s definitely a tautological argument, but the longer that core pieces of the AI trade go without making new highs, the more traders might believe that the highs have already happened.

Get the worm

Who among us hasn’t woken up at 7:30 a.m. ET with a burning desire to trade options on single name stocks and ETFs and the impatience to wait a couple hours?

(I’ll confess I woke up in the middle of the night on the day of the September non-farm payrolls report with the urge to punt on small caps, but refrained.)

Anywho, Cboe rolled out earlybird (and postmarket) expanded hours for options trading in 23 companies and five ETFs (SPDR S&P 500 Trust, Invesco QQQ Trust, iShares Russell 2000 exchange traded fund, SPDR Gold Shares ETF, and Financial Select Sector SPDR Fund) effective this morning. It’s a huge expansion of the suite of offerings available during off-peak hours (previously limited to index options).

For stocks to be eligible for these extended hours, they must have at least an average daily option volume of 150,000, a market cap of $50 billion, and 10 million shares of volume in the underlying.

SpaceX was a last-minute exclusion from this group, and (if you can’t tell) I think two of these selections stand out like sore thumbs.

To adapt the cliché, the early bird gets the worm…but maybe not the tightest spreads or best pricing.

I’m definitely interested in seeing the uptake here and what (if any) impact there is on market structure.

It’s probably a safe bet that more (leveraged) activity in suboptimal liquidity is a recipe for more intraday volatility. Perhaps we’ll see a stronger signal from intraday momentum amid a follow through in names getting a lift from premarket call buying, or maybe substantial reversals if there are more “air pockets” in the event of lumpy demand (particularly if activity is concentrated in short-dated contracts that get open and closed on the same day).

For what it’s worth, my come-to-Jesus moment on the power of retail traders came in February 2020 when r/wallstreetbets selected Microsoft — a massive, liquid stock — as a target for coordinated buying activity during the premarket and at the open. And all that purchasing power did have a visible knee-jerk effect!

The fix is in(come)

There are loads of active investors who can stomach volatility and eagerly jump on momentum trains or catch falling knives in the hopes of outsized returns.

But there is also a ton of investment capital (whose AUM probably dwarfs the above group) that is focused squarely on having solid visibility into mid-to-high single digit returns.

Last week my pal Michael Sedacca, portfolio manager at Rareview Capital, remarked on how this latter cohort can now go up in quality/down in the risk curve to get the kinds of returns the classic balanced portfolio was expected to produce since the financial crisis.

“If you go back from 2010-2020 the 60/40 portfolio was driven by 9% expected return on stocks and 3% return on fixed income to get to a 6-7% annualized return,” he said. “Now you can get that with 100% fixed income.”

Jeff deGraaf, head of technical research at Renaissance Macro, went into further detail on this changing of the guard in a weekend note:

The S&P 500’s free cash flow over enterprise value (“the equity market's closest analog to a real yield”) is slightly below the rate on 10-year Treasury Inflation Protected Securities.

“FCF/EV is the real return before growth; when it sits at or below the real yield, the equity case becomes entirely dependent on real growth with little margin of safety,” he concludes.