Photo by Mateus Campos Felipe on Unsplash 

A general axiom for the market is that traders will go back to what worked in previous moves higher following a correction. I’ve been waiting for the option market to reflect that kind of optimism, and we got that yesterday. 

The Magnificent Seven (or “Mag 7,” if you’ve been around the block a few times) have been the leadership for this market for a long time. Their sheer size means that they are the market - or at least 34.6% of it, as of the end of 2024. 

Now, if that number is striking to you, that’s because it is insane! 

The following companies comprise the Magnificent Seven; I’ll give their individual approximate weighting in the S&P 500, too:

• Apple (AAPL): ~7.5%
• Microsoft (MSFT): ~6.5%
• Amazon (AMZN): ~4.5%
• Nvidia (NVDA): ~4.0%
• Alphabet (GOOGL): ~4.0%
• Meta Platforms (META): ~3.0%
• Tesla (TSLA): ~2.9%

It hasn’t always been this way, but the trend began just before COVID and the trend only accelerated post-COVID as policies and stimulus fed the Magnificent Seven beast. Here is a breakdown of the Mag 7 share of the S&P 500 over the past 10 years provided by Visual Capitalist:

Looking at the numbers, the only decline was seen during 2022, when the S&P 500 finished 18.11% lower for the year. While that trend saw the Mag 7 as a percentage of the S&P 500 decline from 29.1% in 2021 to 21.6% in 2022, the positive trend has been restored over the past two years. 

In fact, it has accelerated. 

Don’t be fooled: These numbers reflect the weakness in the market as only a handful of companies drive the performance of an entire index. They also reflect the drive for investors to look to the leadership of these companies when prices falter.

I think they may come away disappointed. 

About Today’s Litmus Test

So why was yesterday so special? And why is today so crucial? Let me explain.

Yesterday we saw institutional traders wade back into the Magnificent Seven waters using long call options. Thousands of contracts were bought across the Mag 7 spectrum is a reflection of the desire to capitalize on a move higher. The following is a sample of some of the significant activity:

• Apple (AAPL): 21 MAR 25 $215 calls bought
• Microsoft (MSFT): 21 MAR 25 $392.50 calls bought
• Amazon (AMZN): 21 MAR 25 $197.50 calls bought
• Alphabet (GOOGL): 28 MAR 25 170 calls bought
• Meta Platforms (META): 28 MAR 25 $600 calls bought

What do you notice about the option activity? These are very short-dated options with three of them expiring today and the rest next week.

Essentially, they’re looking for an immediate move in the underlying Magnificent Seven stocks. 

Another point to make is that all of the companies hit the strike that was traded yesterday and backed off with the only exception being GOOGL. 

With option buying, it’s an indication of direction, magnitude of movement and the timeframe for the move. It doesn’t guarantee that the move will happen, but the options moving ITM can drive further buying pressure called a gamma squeeze. 

Why is today so significant? 

The reason why I’m looking at today as being a litmus test for the market is that this type of activity should help the market rally off its lows. The continuation in this type of activity should help drive Mag 7 companies higher in the near future as their share of the S&P 500 begins to be regained. 

Looking at the chart of the Roundhill Magnificent Seven ETF (MAGS), the price is naturally positioned to rally as it is currently resting on the 61.8% retracement of the trend from August 5, 2024, near $46. If the price breaks this level, the expectation is for the price to fall back to the August low near $38.50.

If the market fails to rally… those traders who waded back into the Mag 7 waters yesterday will fail. It’s generally representative of weaker conditions and these shares are now more likely to break their recent lows. If you’re a bull, today really matters!

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