Stocks fell sharply, with the S&P 500 leading the decline, finishing the day down almost 1.6% at 5,860. Meanwhile, the Nasdaq 100 dropped nearly 2.75%, closing at 20,550. This decline was primarily driven by Nvidia (NASDAQ:NVDA), 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 yesterday’s selloff.
Nvidia also broke key technical levels yesterday. 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 yesterday, 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 yesterday’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 yesterday. Whether this is a genuine breakout will depend on today’s follow-through.
Another notable move yesterday 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.