The Stock Markets Cracks Are Growing As Nvidia Craters Post Earnings

Stocks fell sharply, with the S&P 500 leading the decline, finishing the day down almost 1.6% at 5,860. Meanwhile, the NDX dropped nearly 2.75%, closing at 20,550. This decline was primarily driven by Nvidia, which fell 8.5% to end the day at 120.

Anyone following this commentary for some time knows that Nvidia was positioned in a way that made a pullback likely following its earnings results, primarily due to the way the options market was structured around it. The market had been highly bullish, with significant call delta exposure, but after the results, those deltas burned off, and implied volatility dropped sharply, leading to today’s selloff.

Nvidia also broke key technical levels today. The next major support level appears to be around 118, and if that breaks, it could set up a move down to 109.

As for the S&P 500, a critical level at 5,900 was broken today, nearly filling a previous gap. The index pulled back to around 5,860, though there may still be some room for further downside. More importantly, 5,900 had been serving as a major support level and a “put wall” from a gamma perspective. Now, it appears that the put wall has shifted down to around 5,800, suggesting that if the market wants to decline further, there is room for it to do so.

Previously, the market had been range-bound between 5,900 and 6,100, but after today’s close, it seems that range may now extend down to 5,800.

The same is true of the NDX, which finds itself at support at 20,550 and what appears to be a double-top pattern. A break of support at 20,550 probably means we see a drop to around 20,000 to start.

The bigger question is whether credit spreads will begin to widen significantly. While valuations could justify a lower market, they are not a good timing tool. Instead, credit spreads need to show material widening to confirm a sustained decline. We are seeing early signs of this, with the CDX high-yield credit spread index closing above a trendline today. Whether this is a genuine breakout will depend on tomorrow’s follow-through.

Another notable move today was in the dollar, which broke out of a falling wedge, signaling potential further strength. This move was reflected across multiple currency pairs, including EUR/USD, GBP/USD, and USD/JPY.

Additionally, the 10-year yield rose by one basis point, which, given the S&P 500’s decline, suggests we are still in the same broader market cycle. The 2s/10s yield curve also steepened slightly by about three basis points, and for now, there’s no apparent reason to change the outlook that the yield curve could continue to steepen.

Some are calling this a “growth scare,” but it’s unclear whether that’s the true driver of the current market moves. More significant economic data should provide more clarity by the end of next week. That’s all for today. Have?a great Friday!

-Mike

Options & Market Structure Terms:

1.Positive Delta – A measure of how much an option’s price is expected to move relative to changes in the underlying asset. A high positive delta means options traders were heavily positioned for Nvidia to rise.

2.Implied Volatility (IV) – The market’s expectation of future price fluctuations. A drop in IV after earnings means options became cheaper and traders unwound bullish bets.

3.Put Wall – A concentration of put options at a certain price level that can act as a temporary support in the market, as dealers hedge their positions.

4.Gamma Perspective – Refers to the impact of options dealers hedging their exposure. A shift in gamma levels can influence market movements in unexpected ways.

Technical Analysis Terms:

5.Gap Fill – A situation where the price moves back to a level where it previously gapped up or down, completing a prior price void.

6.Support Level – A price level at which an asset historically finds buying interest, preventing it from falling further.

7.Falling Wedge – A technical chart pattern that signals a potential bullish reversal if price breaks to the upside.

Macro & Credit Market Terms:

8.Credit Spreads – The difference in yield between corporate bonds (especially junk bonds) and risk-free government bonds. Widening spreads indicate rising credit risk and potential market stress.

9.CDX High-Yield Credit Spread Index – A benchmark for credit risk in junk bonds. If it breaks out, it suggests investors are demanding higher compensation for credit risk.

10.2s/10s Yield Curve (Steepening) – The spread between 2-year and 10-year Treasury yields. A steepening curve can indicate expectations of stronger economic growth or rising inflation.

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