The rally started with a fire sale.
Last week, reports said Leopold Aschenbrenner's Situational Awareness fund had to sell billions of dollars of popular AI stocks/). Instead of sinking the market, that selling marked the bottom.
Through last Wednesday, the Nasdaq 100 had fallen more than 10% from its peak. Then the selling stopped, and the recovery took over.
On Tuesday, the index jumped 3.3% to close at 29,733.
That puts it within 3% of its June 3 record. Tech stocks came back to life, with memory-related names rebounding strongly and materials and industrial shares rising 2%.
As stocks climbed, the options market showed investors flipping from scared to greedy in a hurry.
A call option is a bet that a stock or index will go up, and the more people want those bets, the more they cost. On Tuesday, QQQ calls one standard deviation from the money became 42% more expensive.
Those are long-shot bets, and the market priced them with a 16% chance of paying off. QQQ is the most popular exchange-traded fund for tracking the Nasdaq 100.
That was the largest one-day jump in options volatility on those contracts since 2020, and the ninth-largest such move in a decade, according to Nations Indexes. The same reading for SPY, the S&P 500's most popular ETF, posted its seventh-largest jump in three years.
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"Pessimists threw in the towel and optimism was running amok today," said Scott Nations, president of Nations Indexes. "It's absolutely fair to say this was one of the ten most bullish days for Nasdaq 100 over the past 10 years."
Calmer markets are helping. The 10-year Treasury yield stayed below last year's highs as the bond selloff stalled, and oil slipped below $80 after President Trump suggested an Iran deal was near.
Earnings are strong, too. FactSet projects S&P 500 earnings grew 47% in the second quarter, the biggest jump since the 2021 post-Covid rebound.
Stocks also look reasonably priced. The forward 12-month P/E, which compares stock prices to expected profits, sits at 19.6, below its five-year average.
Kevin Davitt, who handles research and strategy at Nasdaq, pointed to what he called "heightened investor participation as markets regain momentum following strong earnings and post-FOMC stabilization." Translation: solid profits and a Federal Reserve that didn't scare anyone brought investors back.
The rally also has some breadth. The Invesco Equal-Weight S&P 500 ETF, which treats every company in the index the same, rose 1.4% on the day and is up 14% this year, ahead of the S&P 500's 13% gain.
The market's mood has shifted quickly from the forced selling that marked last week's low. A 10% Nasdaq 100 drawdown, a heavy AI-related liquidation, and an anxious options market have given way to a torrent of optimism in the span of about a week.
One number shows the rally has an unusual wrinkle. The VIX, Wall Street's main fear gauge, rose at the same time stocks climbed.
Data from CNBC and Convex Asset Management shows that stocks and the VIX have risen together on the same day only about one-fifth of the time.
Noel Smith, chief investment officer at Convex Asset Management, warned against chasing the move with cheap, long-shot call options. "If you want to get long after today, maybe don't buy out-of-the-money calls," he said.
"This is no longer a good time to buy those calls because if we're up but VIX is down, you're not going to do great, and if it's spot down VIX down, you'll get wrecked."
In plain terms: the lottery tickets that looked brilliant last week now cost too much. The easy part of the bounce might already be over.
The Nasdaq 100 is still only about 3% below its June 3 record, and strong earnings have supported the rally. Those facts have not changed even as options trading has become more frenzied.
For your portfolio, what matters is the view underneath the options noise.
That doesn't guarantee a smooth ride. It does mean the rally has more than hot options bets holding it up.
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