Whenever I leave my kids (including my dog) overnight with anyone else besides my partner, a grandparent, or like this summer, sleepaway camp, my feelings oscillate from one to the other: from “they are growing up too fast, I need to spend every minute with them” to “woohoo time for things I haven’t been able to do”. Then cut to me seeing a picture of them pop up on my phone and I’m back to missing them terribly. While my feelings are biased towards missing them, the regular changes of heart are something I’d rather not experience on a daily basis. Is it a coincidence that the market has been blessing us with the same flip-flopping of sentiment from one day to the next? For me personally, summer camp will end and I’ll get my babies back. The market, however, will likely not stop yo-yoing until we get some sort of cleansing pullback.

An illustration of the yo-yoing (daily returns of the S&P tech and consumer staples sectors):

Not only is there a back and forth, but even before this the moves felt exacerbated. Why do moves happen now faster and sharper than the news alone would explain? 

Well, first let’s talk through the concept of delta and gamma.

Delta is how much an option price moves for a $1 move in the underlying security. Gamma measures how much an option's delta changes as the underlying stock price moves. So delta sets the direction, and gamma hits the gas.

Dealers always take the other side of trades to hedge. If more customers are selling options, their delta increases as the stock goes up and decreases as the stock goes down (they are long gamma). That means the whole market naturally benefits from big moves. To hedge this, dealers sell stock as it rises and buy stock as it falls. This is stabilizing, naturally dampening volatility.

But if customers are greater buyers of options, they’re short gamma and the opposite happens. Their delta decreases as the stock goes up and increases as the stock goes down. To hedge this, dealers have to buy stock as it rises and sell stock as it falls. This amplifies volatility.

With that in mind, there are three things working in the market right now.

1. The market runs a lot more on same-day bets. A huge share of S&P 500 options trading is in contracts that expire the same day, or "0DTE" for short. According to CBOE, back in 2016 that was about 5% of index options volume. In 2025, individual months set records above 60%. Even if you aren’t an options trader: when one of these is bought or sold, a dealer takes the other side, and to stay neutral they buy or sell the index itself. Normally that hedging is a shock absorber—they lean against the move. But with the volumes in short-dated/0DTE call options, dealers' books sit closer to neutral and flip to short gamma more easily. Hedging ends up leaning with the move more often, adding fuel instead of dampening it.

2. Leveraged ETFs have grown immensely. In the last year, they have grown from about $135B in assets under management to more than $180B. Since these products have pulled in record money, the mechanical footprint is bigger than it used to be. 

Leveraged ETFs (the "2x" and "3x" products) promise a multiple of the market's or a stock’s daily move and, as a result, inherently sell low and buy high. During their daily rebalance, they buy more after the market rises and sell after it falls, often bunched into the final minutes of trading. It means a big down day mechanically generates more selling into the close (or the opposite on a big up day), regardless of fundamentals.

This phenomenon also exists in South Korea where the market has been very hot.

3. There’s more borrowed money and it costs more now. A lot of professional money runs on leverage, with tight risk limits that force selling when losses hit a threshold. Multi-manager hedge funds, such as Millennium, Point72, and Balyasny, have grown since COVID. These platforms run high gross exposure strategies, meaning they have large long books and large short books simultaneously, consume prime brokerage balance sheets, and are one of the largest contributors to financing rate pressure. ETFs with leverage discussed above are another.

And because interest rates are higher and the market sits at higher levels, carrying all that borrowed exposure simply costs more than it did a few years ago, which leaves a thinner cushion when things wobble.

Even if you personally have no levered ETF exposure and run a straightforward long-only portfolio, the mechanical rebalancing flows affect the prices of the securities you own on a daily basis. As I heard on a recent Bloomberg Odd Lots episode, "You may not be interested in leverage, but leverage is interested in you." 

Put the three together and you can get what I think of as the amplifier loop: a shock hits, dealers hedge into it, leveraged ETFs rebalance into it, losses trip risk limits at levered funds, and the extra selling becomes a shock.

Of course the same machinery runs in reverse on the way up. It suppresses volatility and rebuilds positions during calm stretches, which is a big reason the market can feel so smooth right up until it doesn't. That's the trade-off of the current market's wiring.

So this is a reminder that:

• A sudden 2-3% market air pocket doesn't always signal that something is fundamentally broken. 

• If you own leveraged or inverse products, know that they're designed for a single day, not a buy-and-hold; the daily reset can work against you over time. 

• Mechanical rebalancing creates predictable intraday patterns. 

What I'm watching: Stretches of unusually low volatility (that's often when leverage is quietly building), the size of the moves in the last 30 minutes of the trading day, and whether calm days start giving way to sharper single-day swings. Oh, and the Instagram account of my kid’s camp for glimpses of them and their hopeful happiness while away.