Brian Sullivan’s Top Three Risks to the Stock Market

Brian Sullivan, former commodities trader and host of CNBC’s Worldwide Exchange, sat in with the Rebels this Friday for a special edition of Cocktail Hour. Dirk Mueller-Ingrand gave Brian the floor. Given his unique experience, he asked for his thoughts on the biggest market risks moving forward — and Brian didn’t hold back. 

Brian Sullivan was a great person to ask because of his vast prior experience trading commodities — particularly oil, which has driven the economic conversation lately. But the rising commodity prices were not what had Brian worried. 

His concerns were more systemic than a likely transitory price hike in oil. (Sorry readers, we know that word has been severely overused by now.) 

Let’s take a look at what Brian’s top concerns are, starting with his number one risk.

Investor Inexperience

“The biggest risk to this market, honestly, is inexperience. If you’re under the age of 40 or 45 years old, you’ve never traded in an environment like we have now.”

Related to his concern about the inexperience of investors in the market was his second biggest risk:

Hedge Fund Algorithms

“The “smart money” — all the algos, how does make an algorithm for an environment that they’ve never lived through? The guy programming the software is probably 35 years old. I’m not calling for some collapse, we’ve had a pretty good haircut in a lot of these stocks, but I think there’s a giant risk of things going south.”

Despite Brian’s worries, he’s quick to comment that he isn’t calling for some immediate collapse, noting that we’ve already seen quite a large pullback in 2022. But he can’t help but worry that most of the market’s participants have only seen one type of market: a buy the dip market. 

Brian fears that traders, investors, and even the algorithms wielding large warchests are all programmed to “buy the dip” — but what if the dip keeps dipping? What if buying the dip stops working? 

One stock that traders have been “buying the dip” in lately is the most valuable automaker in the world, Tesla ($TSLA). But they don’t always buy the dip with shares. Often, traders and hedge funds place their bets in the options market, and few names receive more options volume than Tesla. 

With so many big option trades tied to the EV giant, Brian’s worried about how much pull they have over the entire tech sector. He debriefs us on his final worry in the clip below.

“Tesla isn’t important to the market — Tesla is the market”

”Tesla is a huge risk to the market. Tesla’s not just important to the market – it is the market, because so many options strategies (“Delta one” on the street) are tied to Tesla equity. So, if Tesla doesn’t come back, I just don’t see how the overall tech space comes back.”

Brian’s worried a breakdown in Tesla will cause a cascading breakdown in tech. That said, a close look at the YTD charts may assuage some of his concerns. In the chart below Tesla is overlaid with $QQQ (Invesco QQQ Trust, a representation of Nasdaq and the US tech market). 

Chart courtesy of TradingView

Throughout 2022, $QQQ (represented by the orange line), has actually shown significant relative strength in the face of a more than 25% decline in Tesla’s stock price. In fact, the Invesco QQQ Trust has outperformed Tesla by more than 12% year-to-date.

Still, a 14% correction in tech is nothing to balk at. And that doesn’t mean that an even greater decline in the EV titan wouldn’t signal more tech pain to come. 

The bottom line

None of these risks are meant to scare you out of your positions. Brian Sullivan isn’t calling for a crash, he’s not warning of impending doom. He’s just using his decades of experience as a trader and market reporter to provide insight about a time in the market that we have never experienced before. 

However, by staying disciplined, and utilizing all of the tools in our trading toolbox, we can rest easy. As options traders, we know that even the largest decline in the stock market wouldn’t take us out of the game. That’s how Jon, Pete, and the rest of our Rebel traders have survived through so many hairy market conditions. And that’s how you could survive the next market decline, whenever it happens.