This Week's Rollercoaster Ride

Revisiting Nvidia's earnings, sector struggles, and interest rate waves

• Nvidia's initial market boost wanes, reflecting wider sector weakness and interest rate fluctuations.
• The magnificent seven's dominance sparks unease and broader market challenges highlight sector disparities.
• Yield shifts affect mortgage rates and the housing market, amid Jerome Powell's imminent speech.

As the curtains lifted on Thursday's trading session, a promising aura enveloped the markets, propelled by Nvidia's stellar earnings report. Yet, much like the fleeting brilliance of a comet, the initial rally quickly dimmed, leaving stocks to not only surrender their gains but to venture into negative territory by day's close.

The S&P 500 experienced a 1.3% decline, and the Nasdaq Composite suffered a steeper 1.9% drop. Nvidia, which initially ignited the day's hopeful trajectory, eventually settled just below $472 after reaching heights near $502.

Throughout much of this year, the market's ascendancy has been notably guided by what's been dubbed the "magnificent seven": Alphabet (GOOGL), Amazon (AMZN), Apple (AAP), Meta (META), Microsoft (MSFT), Netflix (NFLX) and Nvidia (NVDA). The concentration of gains among these tech titans has raised concerns among analysts due to its implication that not all stocks have partaken in the rally.

Previously, I highlighted the significance of Nvidia's performance in determining market direction, yet recent losses have cast a broader shadow. A striking indicator of this trend was the simultaneous downturn across all 11 sectors in the S&P 500, hinting at the presence of either a deceitful bull market or at least a less robust one, where certain stocks that should have reaped rewards remain in the shadows.

A closer look at specific stocks further illuminates this narrative. Disney's (DIS) shares dropped by 3.9% on Thursday and have incurred a 5% loss for the year. Nike's (NKE) year-to-date performance reflects a staggering 17% decline, while Goldman Sachs (GS) has drifted nearly 7% below its 2022 closing mark. This dichotomy became more apparent during earnings season, where companies exceeding estimates were rewarded with modest gains or stability, while those falling short were promptly penalized. Apple's example from the recent past is mirrored today by Gap's (GPS) lower indications.

Shifting focus to interest rates, a notable shift in the yield landscape is observed. The two-year note's yield surpassed 5%, while rates on the benchmark 10-year and 30-year Treasuries similarly surged. This phenomenon has prompted a surge in 30-year mortgage rates, averaging at 7.23%—their highest level since 2001. Notably, the ripple effects extend to mortgage applications, which have receded to levels reminiscent of 1995. It's less an indication of a feeble housing market and more a reflection of homeowners with 3% to 4% mortgage rates being disinclined to relocate and invest in homes at rates that would double. Consequently, stagnation among existing homeowners has caused a pricing surge that challenges aspiring new buyers, with the confluence of elevated rates and unmovable existing homeowners becoming a formidable barrier.

Amid the interest rate dynamics, Fed chair Jerome Powell's imminent speech is a significant point of interest as the Jackson Hole conference reaches its conclusion. This event serves as a vantage point for gaining insights into the Fed's pre-September meeting sentiment. Currently, there is an approximate 80% probability that rates will remain unchanged next month. Yet, deciphering the post-September trajectory remains as intricate as decoding the offerings of a Michelin-starred restaurant.

A vital lesson is gleaned from Nvidia's journey, especially for new options traders. The elevated premium in Nvidia options pre-earnings exemplifies how being correct about the directional move might still result in financial losses due to the premium expenditure. Those who clung to long-call positions beyond the early day's gains witnessed the diminishing allure. This underscores the importance of maintaining small positions, as markets adeptly factor in pricing efficiency. During market tumult, adhering to your investing plans and long-term objectives remains a prudent guiding principle.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan

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