Market volatility tends to be destabilizing when it leads overleveraged traders or firms to blow up. This can lead to domino effects as banks and prime brokers may pull back on the amount of credit they extend to the traders and funds.

These can be one-off events with supply being quickly absorbed, or it can lead to losses in asset prices that start to have real-world impacts. Some of the most famous blowups in market history including Long-Term Capital Management (LTCM) and Lehman Brothers caused markets and the economy to spiral downward and required significant amounts of intervention from the federal government and Federal Reserve.

Archegos Capital

The latest blow-up has been Bill Hwang's Archegos Capital Management which was a family office. The company had to default on its position due to several margin calls from its brokers which included major Wall Street and global banks such as Nomura, Credit Suisse (CS  ), Goldman Sachs (GS  ), and Morgan Stanley (MS  ).

Archegos held concentrated and leveraged positions in many high-multiple stocks such as ViacomCBS (VIAC  ), GSX Techedu (GSX  ), and Baidu (BIDU  ). All of these stocks were down by more than 50% at their recent lows. It's puzzling that Hwang was able to carry such leverage without his brokers raising red flags.

Hwang held about $10 billion in long positions but was levered at 5:1 which caused cataclysmic losses when his brokers liquidated his holdings. Hwang's strategy had been remarkably successful as he had turned $200 million into over $10 billion employing this strategy.

Stock Market Outlook

So far, the market seems to have digested the liquidation of Hwang's portfolio pretty well. The S&P 500 (SPY  ) made new highs this week on strong volume, following a blowout jobs report. However, his largest holdings remain depressed and have posted only modest gains from recent lows.

These stocks could provide some upside opportunity especially as market conditions remain favorable for owning equities due to the Fed's low-interest rate policy and expected earnings growth over the next 12 months on a strong outlook for the economy.