Stocks were modestly lower, but there was a clear risk-off tone throughout the day as rates rose sharply, along with the dollar. The CDX high-yield credit spread index also moved higher. Despite the S&P 500 finishing down about 20 basis points, the day felt much worse, with the equal-weighted S&P 500 dropping more than 80 basis points.Market breadth was poor as well, with only 80 stocks up and 419 stocks down on the SPX.
Nvidia Did It Again
If you’re wondering why the market didn’t drop even further despite such a rough day, the answer is simple: Nvidia (NVDA). The stock rose more than 3% as options traders continued their activity. Today, the $140 weekly options expiring this Friday helped support the market. In fact, Nvidia accounted for 150% of the gains in the Bloomberg 500 today, contributing about 5.7 points.
This explains why the equal-weighted S&P 500 was down 83 basis points, while the S&P 500 was only down 18 basis points for the day.
In the meantime, Nvidia saw its implied volatility (IV) rise today while skew fell, signaling a clear gamma squeeze. More importantly, Nvidia’s IV is nearing 60%, a level the stock historically struggles with. This is likely because, at that IV level, call options become less profitable.
Higher Rates Have Big Impacts
It was a rough day for small-cap stocks, with IWM dropping 1.6% as the 10-year rate surged nearly 11 basis points. IWM failed to break through the $226 resistance level for the second time since July.
In the meantime, the 10-year yield broke above resistance today, closing just shy of 4.2%. The key level to watch is around 4.35%—a move above that could signal a major breakout, potentially pushing the 10-year back to the 5% highs seen last October.
As previously noted, the 10-year yield could even be headed toward 6%. This isn’t far-fetched, especially if overnight swaps for Fed Funds rates are correct in suggesting the neutral rate is around 3.5%. If the 10-year trades 200 basis points above the Fed Funds rate, that brings it to 5.5% fairly easily. If it trades closer to its historical spread of nearly 300 basis points, we could be looking at a yield closer to 6.5%.
In the meantime, the HGX housing index dropped nearly 3% today, finding support at the uptrend line that’s part of the bump-and-run pattern it has formed. As rates continue to rise, it’s increasingly likely that HGX will keep declining.
The same likely applies to sectors like biotech, which fell nearly 1.7% today. They seem to move in tandem with TLT.
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