Is This A Market About To Crash? The Cestrian Circle Newsletter
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The Beach Ball Principle
by Alex King, CEO, Cestrian Capital Research
Very often in securities markets you will hear people use a beach ball analogy. Push the beach ball deep underwater and let go, it will pop right back up. The more force it takes to push it down, the more brutally it will rip back up at you when you let go. The reason this is a thing in securities markets is market-maker hedging. Market makers continually provide bids and asks in the securities they cover, and make money on the spread between the two, amongst other things. Their model is designed to be “delta neutral” ie. neutral as to price; if the market is going up, they should be making money, down, also making money. Sideways, also making money.
When markets turn risk-off, as has happened in US equities in recent weeks, investors are wont to buy insurance, be that by taking short positions in stocks, by going long inverse ETFs, or, most commonly, by opening long put positions. Generally speaking we may assume that the average investor buys puts too late and with too much weight. The put options are sold to them by options market makers; if you sell a put, you’re long, and remember the market maker has to be delta-neutral, so they hedge by taking a short position in (eg.) the futures market.
A wonderful day for market-makers is when a whole lot of puts expire out of the money; this means they get to keep a wall of premium. And once those puts expire, the market maker must close out the short position, since there is no longer a long position to hedge. The short-covering rally that follows can often be enough to generate real momentum back upwards. Which is your beach ball, right there.
A Short-Covering Rally
This is particularly true if a short-covering rally is accompanied by some other catalyst. Now, today, everyone and their trading bot buddy is doleful about stocks, bonds, crypto, everything. The Ende Of Ye Worlde is, apparently, Nigh. But today was also Q1 options expiry when the biggest-ever value of options expired. And this means that Monday will see a lot of rebalancing hedge flows from market makers. Obviously it will be more complex than “Jane Street Is Buying Back Shorts, Yay!” but directionally we can expect a short-covering bounce to be happening beneath the surface Monday. Whether it is enough to shoot the beach ball right back in the faces of bears comes down to (i) any positive newsflow over the weekend re. the war in Iran, oil prices, &c, and (ii) anything firm on the Clarity Act, which is the final pillar required to fully legitimize and institutionalize the more grownup forms of crypto - stablecoins, Bitcoin, Ether.
Crypto Is Risk-On
Bitcoin and Ether were green today, in a sea of red in equities. That’s usually a leading indicator for equities.
And then right after the close, this happened in $SPY:
This is my point. There was a good chance that equities would start to recover after the close anyway - the downward pressure from opex being alleviated - but coupled with (i) potential de-esclation in Iran and (ii) progress on the Clarity Act - this is what you get.
The lesson? Learn to see the world through the eyes of the market, not the market through the eyes of the world.
Bullish Equities
Are equities about to crash? Well, anything can happen, but I think probably not. I think the Administration likely to enact policy to bring down bond yields - this directly affects the future cost of government funding and it indirectly affects the cost of credit in the wider economy. The 10yr for instance has this look about it right now.
If bonds get saved, as I think they will, then equities will follow.
I think $SPY can make it into the mid $700s, and $QQQ into the low $700s , by the midterms.
Have a great weekend. And thanks for reading today’s Cestrian Circle Newsletter. See you next week for more!
Cestrian Capital Research, Inc - 20 March 2026.