Nvidia Weakness and Dispersion Unwind Signal Potential S&P 500 Pullback

The S&P 500 finished the day down by around 50 bps, following Nvidia’s decline. The dispersion unwind also appeared to start today, with the S&P 500 constituent volatility index dropping to close below 40, while the VIX rose to 18.6. This resulted in the spread dropping to 21.1 from 23.4 yesterday. I think this spread will continue to contract as we move forward.

The narrowing spread led to the dispersion index DSPX falling on the day to 35 from 37.2 yesterday. Meanwhile, the 3-month implied correlation rose to 14.1. The fall in dispersion and rising implied correlation resulted in the spread contracting too. This spread should also continue to narrow over the next few weeks, and probably until the beginning of April. Based on this, the decline in the S&P 500 should now commence. How much the index falls will depend on how quickly the spread narrows.

Over the last few occasions when the spread was this wide, we have seen declines of 5% to as much as 17% based on closing prices, but a 5 to 10% pullback seems possible at this point. Nothing is clean and easy to decipher in the market, but the unwind in November 2025 was a bit unusual, so, in theory, the decline could have been bigger, though other year-end factors may have been in play.

My general view would be that the S&P 500 equal-weight will not be immune to this.

As for Nvidia, there were no surprises in today’s sell-off. It was widely noted that a move lower was the likely outcome, given the options positions heading into results and the high levels of implied volatility. The key level at this point is $170, and it could come into play over the next few days to a week. If that level breaks, it will become a big problem for the stock and the market. It would confirm what appears to be the neckline of a head and shoulders pattern, with a projected decline to around $130.

-Mike

Glossary by ChatGPT

Dispersion Index (DSPX) – An index measuring the level of implied volatility dispersion among S&P 500 constituents.

Head and Shoulders Pattern – A technical chart formation signaling a potential trend reversal following the break of a defined neckline level.

Implied Correlation – The market-implied degree to which individual stocks within an index are expected to move together.

Implied Volatility – The market’s forecast of a security’s expected price fluctuation derived from options pricing.

S&P 500 Equal-Weight – A version of the S&P 500 index in which each constituent has the same weighting rather than market capitalization weighting.

Spread (Volatility Spread) – The difference between index-level volatility and constituent-level volatility, often used to assess dispersion dynamics.

VIX – The Cboe Volatility Index, measuring the market’s expectations for 30-day volatility in the S&P 500 based on options prices.

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