Who could buy after the crash

Easy version of DK's November 6 note on a Citadel report dated November 5. This is not investment advice. Chart captions and repeated lines were left out.

In one line, U.S. stocks gave back the post-election gain in one day. The day before the crash, Citadel said buyers could return by year-end. DK said the point is to watch whether those buyers actually show up.

An index is a score made by putting many stock prices into one basket. The S&P 500 fell ▼ 4.36%, the Nasdaq Composite 5.52%, and the Philadelphia semiconductor index 12.52%. A Democratic Congress raised worry that data center construction could slow, and that AI spending might not become profit. A data center is a large building of computers that runs AI calculations.

Citadel's note came when S&P 500 futures were 2.6% above the election-night low and Nasdaq 100 futures were 3.5% above it. Its reasons were buying power from individuals, companies, and trend-following funds, third-quarter results that beat high hopes, cheaper chip valuations, and the usual fourth-quarter pattern in a midterm year. Valuation is a yardstick for whether a price is expensive versus profit. The next day, the market did the opposite.

Citadel said October was a rotation, not a full exit. Over 20 sessions through November 2, the Nasdaq 100 fell nearly ▼ 10% while an equal-weight S&P 500, which gives each company the same weight, rose more than 4%. The 14 percentage-point gap was in the top 1% of 20-session gaps since 1990. On down-index days, a median 53% of stocks rose, versus 31% in a normal period. On October 29, SPY fell 0.38% while 406 of 503 stocks rose. November 5 was different: all 11 S&P 500 sectors fell during the day.

The top 10 stocks were 37% of the S&P 500, and the Magnificent 7 were 33%. Nvidia alone was larger than the bottom 235 stocks combined. The top 10 weight had fallen about 2.5 percentage points since the end of September but was still historically high. Of the third quarter's 2.3% S&P 500 gain, the top 10 added 3.4 points and the rest subtracted 1.2. October was the reverse. Citadel said a return of buying into cheaper large technology stocks would move the index a lot, because 37 cents of each passive dollar, money that simply copies the index, goes to the top 10.

Individuals were net buyers of U.S. stocks for 22 straight sessions from October 5, about $33 billion in total. That was the sixth-longest and fifth-largest such streak since 2017. The average day was $1.5 billion, 1.4 times the past year's average, while the S&P 500 fell ▼ 2.0%. Of 12 prior streaks of at least 15 sessions, 10 happened while the S&P 500 rose, with a median gain of 2.2%. A streak this long had not happened before during a larger index drop.

The summary said approved buybacks were a record $1.5 trillion, and that a blackout covering 85% of market cap would lift around November 9. A blackout is a period around earnings when a company cannot buy its own shares. Market cap is the value of all shares added together. CTA positions, trend-following funds, were down to minus 3.3 standard deviations. Since June, semiconductor profit forecasts rose ▲ 30% while the forward P/E, price divided by expected profit, fell 35% to 13.8 times. The Nasdaq 100 P/E was 19.1, the lowest since October 2022. DK also said to watch whether the VIX, a score of expected stock swings, comes down from an intraday 28.

Three lines to keep. November 5 was not an October-style day when other sectors caught the technology drop. Citadel saw room for individuals, buybacks, and trend funds to buy. Whether they did was not confirmed when this note was written.

Left out: charts and later case studies. Buyback, VIX, and P/E figures are from the summary. Citadel's view is a view, not a fact.