TERADAT SANTIVIVUT
Nvidia down, but S&P 500 up
The S&P500 (SP500) has been rising since October 2022 primary led by the tech mega caps under the Gen AI theme – and most notably by NVIDIA Corporation (NVDA), the poster child of the Gen AI bubble.
I say the Gen AI bubble because of two reasons:
- The tech mega caps valuations broadly have increased to unsustainable high level with Nasdaq 100 (QQQ) P/E ratio above 31, and
- The Gen AI technology is not as transformative as initially expected, and it seems like the massive Gen AI capex is not producing a meaningful rate of return, thus, it seems like the Gen AI hype is fading.
The Gen AI bubble potentially busted already with Nvidia falling more than 30% from the top at one point. However, after the early August yen carry trade blowup selloff, Nvidia strongly bounced, pushing the S&P500 higher near the all-time high levels.
Thus, the expectations were that the recent bounce in Nvidia would reverse after the earnings report on August 28th, and thus the S&P500 would also resume the downtrend.
Specifically, I expected that Nvidia would beat the earnings consensus estimates, but the guidance could be weak.
My expectations are that Nvidia could beat the earnings estimates because the GenAI capex has been strong, but the problem could emerge with the guidance.
That’s exactly what happened, and Nvidia fell by 6-7% after the earnings report. However, the S&P500 did not fall as expected. The question is why and what really happened.
The narrow range – breakout or breakdown?
First, here is the chart of the S&P500 showing the early August selloff, and the subsequent sharp bounce to the near all-time high level. In fact, the S&P500 bounce has stalled, and a very narrow range developed over the last two weeks. The expectation was that the Nvidia earnings would cause the range breakdown, and the downtrend would continue.
The S&P500 price action on August 29th (after Nvidia earnings) was very bearish, whereby the initial increase to the top of the range was met with selling, which pushed the price to the bottom of the range.
The next day, on August 30th, the initial bounce at the opening was also met with selling, which pushed the price towards the bottom of the range, and increased the probability of a breakdown – as expected. However, the surge in price of the last 10 minutes of trading pushed the price back to the top of the range, and now the breakout seems more likely.
S&P500 narrow range (Yahoo)
What happened on Aug. 29th?
Why didn’t the selloff in Nvidia cause the selloff in the S&P500 on Aug. 29th, given the importance of Nvidia in the recent bounce, and the broad bull market?
First, the S&P500 is the market value-based index, where the large stocks have more influence on the index price. The top three stocks represent nearly 20% of the entire index, and these stocks are:
- Apple 7%.
- Microsoft 6.5%.
- Nvidia 6.2%
Thus, Nvidia could have crashed the market when it went down by 7% on August 29, given the 6% weight, especially if other Gen AI related stocks fell in sympathy, specifically Microsoft Corporaton (MSFT) and Apple Inc. (AAPL).
However, as soon as the market opened on August 29th, Microsoft and Apple surged by over 2.5% – and this prevented the initial crash, and also limited the initial drop in Nvidia. As the day progressed, the Nvidia selloff resumed, as the stock price dropped by 7%, and also Microsoft and Apple sold off to finish the day well below the intraday highs. This was a bearish signal.
So, the market did not crash with Nvidia selloff because Microsoft and Apple bounced strongly and kept the entire market from selling off. There were news about Microsoft and Apple on Aug. 29th.
NVDA vs MSFT and AAPL (Yahoo)
What happened on Aug. 30th?
The bearish reversal on August 29th increased the probability of a range breakdown on August 30th. However, the futures were rising overnight, and the market opened higher, which is the usual pump-and-dump pattern. The S&P500 did sell off after the initial bounce.
However, the S&P500 started rising towards the closing time, and surged sharply higher over the last 10 minutes of trading. Note, it was a Friday, the last day of the month, as well as the last day of August, right before the three-day weekend, which officially ends the summer low volume period, before the seasonally weak September.
The surge over the last 10 minutes of trading was led by Microsoft, here is the chart below:
MSFT (Yahoo)
Another stock that surged strongly over the last 10 minutes of trading was Alphabet Inc. (GOOG) (GOOGL), while other stocks followed.
So, again, the mega cap AI stocks have prevented the selloff in the S&P500 after the Nvidia selloff.
Implications
Obviously, some kind of “invisible hand” prevented a deeper selloff in the S&P500 after the Nvidia earnings selloff by boosting the price of other key Gen AI theme stocks, specifically Microsoft, as well as Apple and Alphabet. This buying kept the sentiment positive and kept the broader markets from selling off.
Thus, the Nvidia earnings related selloff was not interpreted as a systematic event, or at least the nature of the event was concealed for the time being.
It is likely the institutional investors that wanted to sell in response to the Nvidia earnings could not sell in a low volume market. Thus, rather than selling, they bought more, in this case other important Gen AI stocks to push the prices higher and keep the sentiment positive and to subsequently sell in a rising market, rather than a falling market.
But the question now is what will cause the next selloff? The Fed is expected to start cutting interest rates, while the labor market is not showing further weakness, and the economy seems to be holding well, based on the most recent data. That’s a bullish situation that could re-inflate the bubble, at least until the next earnings season.
The negative trigger could come from the geopolitical escalation, but this is highly speculative for trading purposes.
The next negative trigger will have to come either from the:
- negative economic data, indicating an imminent recession, or
- higher inflation data, preventing the Fed from cutting.
Until this data emerges, it is prudent to be neutral. I used the opportunity in the early August selloff to buy SP500 (SPX) futures to hedge against the short call option in SPX, and after some adjustments (offsetting longs and buying again) the position is now mostly hedged – delta neutral.
I plan to sell SPX futures with the range breakdown, or buy more with the breakout, and that’s for the speculative part of the portfolio. The main part of the portfolio is still in T-bills.
We are still facing a recessionary bear market, but given the recent data, it’s not imminent. But this is also a highly time-sensitive outlook adjustment given the data volatility and negative revisions.