Rally or Mirage: What’s Really Driving Stocks?

In this episode of IBKR Podcasts’ Market Minute, host Andrew Wilkinson sits down with Kevin Davitt, Head of Index Options Content at Nasdaq, to unpack the powerful rally pushing equities back into the green. They dive into volatility trends, VIX dynamics and the evolving divide between software and semiconductor stocks to assess whether this surge reflects lasting strength or something more fleeting.

Summary – IBKR Podcasts Ep. 373

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Welcome to this Week’s Market Minute. I’m Andrew Wilkinson, director of Trading Education with Interactive Brokers. Welcome, Kevin Davitt, head of Index Options Content from the Nasdaq. Kevin, how are you doing? 

Kevin Davitt

Thank you for having me back, Andrew. 

Andrew Wilkinson

It’s a pleasure. So, Kevin, equity markets seems to be on fire at the moment, and if I’m counting on my green candles correctly, it looks like a close hire on Tuesday as we record, this will be a 10th positive session, so that means that all major US indices are now greened for the year again. Can you frame the current mindset of the investor for the audience, please? 

Kevin Davitt

Wow, that seems like a heavy burden. I’m gonna focus just for a second on your word choice. The investor, and I would argue that for many, many years, since 2022 really, the investor has been fine. The trader that may be more apt to tune into something like this could be struck by a degree of whiplash over the past month or so, and I think it would be understandable, but I think there’s also a significant subset of more the trading types 

That really, really enjoy these types of environments, where you see more meaningful realized volatility, and they equate that with opportunity, and they understand that, you know, volatility is a. A non-directional measure, and markets go up and down, and so my short answer there is like, markets for investors have been doing really well for the past couple of years. This year, it’s nice to see very meaningful global participation. More recently, the US markets have been on fire. What that means two weeks from now, who knows? But for the trading audience, there has arguably been. No shortage of potential opportunity, as well as risk. 

Andrew Wilkinson

So, with the stalemate surrounding the war with Iran and the navigation of the Straits of Hor Moose, how do you see the resulting term structure of equity, given that equity vol has probably come down and people are a little bit more risk on? 

Kevin Davitt

I would say that the way you frame that or characterized a more risk-on market is certainly the case. And it has eased significantly over the past couple of weeks. Now, there’s a couple ways I could probably attack that. I could talk about the term structure of. Like crude oil futures, which has been interesting now for more than a month. 

Your point, however, is more specific to the equity markets, and I’m gonna stick there because we have a VIX expiration tomorrow morning, and it’s possible, this is just me editorializing, that some degree of this volatility crush. Could be related in part to that regular cycle and perhaps markets coalescing around this 7,000 mark in the S and Ps and over 25,000 in the Nasdaq 100. But for those that have been playing along and who understand. Term structure of volatility and follow things like the VIX index and the associated futures. That market went from two points inverted. What I mean by there is April was trading two points above the May future to nearly two points under as we approach April expiration. That’s a four-point swing in a meaningful relationship for capital markets, that month-one, month-two spread. The rest of the term structure looks relatively normal, so at least here and now, and it remains fluid. The index Options marketplace and the term structure of index volatility has returned to normal. 

Andrew Wilkinson

Let’s have a look at the software sector, Kevin. 

A key part of the Nasdaq composite in index. It showed signs of life on Monday, having been quite badly beaten down. It’s still up approximately 25% year to date, as measured by a key software ETF. What’s happening there? 

Kevin Davitt

Your audience has likely heard about both the performance of big software names. Names that they’re familiar with, names that influence the work we do day in and day out. 

You frame the Nasdaq composites, certainly software is influential. They’re also the case in the Nasdaq 100. 

What’s going on there is that I, I think the market is placing a different potential terminal value on companies that, for many, many years, have been able to grow revenues, uh, and bottom-line metrics year after year. Their business model is arguably, there’s the potential for disintermediation on the part of ai. And these models are being updated and advancing very, very quickly. Now, I also think that there may be opportunity for adept end users, like Interactive Brokers has so many, to navigate this and to look at this as an opportunity and really pick and choose what names or what areas of this might be overdone. Because the flip side of that is last week, and this week it continues. Semiconductors are making all-time highs. Hardware names have performed exceptionally well. At the index level, that has distilled out, at least in terms of the Nasdaq 100 of an index, that’s now up 2% year to date, and at the end of Q1 was down 6%. Those aren’t huge numbers, right. And that’s because there is a mix within a broad-based index of things like software that have been a drag and things like hardware and the associated semiconductors that have benefited. 

Andrew Wilkinson

To your earlier point now, Kevin, do you think these people are making longer-term investment decisions at this point, or more buying a very stretched market to the downside? 

Kevin Davitt

I think markets are always going to be made up of both participants, right? We talk about this in vagaries often, but. Being a speculator is not a four-letter word, and every robust market has speculators involved. And there are, of course, plenty of institutions and others that pour money. You and me both, if we’re allocating some portion of our paycheck to passive investments, are participating potentially in both ways, right? And so, focusing on one over the other, maybe when there are swings like this in areas of the market that get a lot of attention, that can attract more of the the speculator element. But I think they’re well-versed in like the, the risk-reward trade off that they might be venturing into, entering into. 

Andrew Wilkinson

Kevin Davitt, as always, an excellent conversation with you. Thank you very much for joining me today.

Kevin Davitt

My pleasure. Good luck to Liverpool, uh, because I hear the, the Champions League is, is, uh, off and running. Thanks. 

Andrew Wilkinson

Thanks, Kevin. Kevin, the head of index content, the Nasdaq in Chicago. Thank you very much for joining me, and thanks to the audience. And remember, if you enjoyed today’s episode, please subscribe wherever you download your podcasts from. Bye for now.