Semiconductor Stocks Pressure the S&P 500

The S&P 500 finished the day lower, with semiconductor stocks leading the way. The SMH ETF bounced off the put wall today, which had moved down to $545. I just do not know how long that level will hold. There appears to be a decent amount of gamma built up there, and much will depend on how quickly it can be eroded. Tomorrow may give us better insight into that.

But clearly, with the sector in negative gamma, a break of support at $545 could accelerate a downside move toward $500. However, ahead of Nvidia, that may be a big task, so a few more days of churning seem possible.

For the most part, the semis are the key to the S&P 500 at this point, and it will be difficult to see the market rally at the index level if the semis are falling. The credit market continues to signal greater risk in the semis, with Broadcom and Nvidia’s CDS widening today. I find it hard to imagine Nvidia and Broadcom’s CDS widening like this while the sector rallies, but stranger things have been known to happen.

Recent data show that Korean inflows have turned to outflows, and the stronger KRW is likely linked to some of that liquidity in semiconductors leaving the U.S. More importantly, the inflow and outflow data are denominated in KRW, so we know the decline wasn’t simply due to the KRW strengthening against the U.S. dollar.

Finally, the VIX1D is very low, below 10, and is unlikely to remain there, given that Nvidia reports Wednesday after the close and Warsh speaks at Jackson Hole on Friday morning. I would expect to see the VIX1D move up toward 20-ish ahead of both events. Whether that increase in implied volatility leads to a market sell-off will depend on whether the VIX rises in tandem.

Maybe that is why the VVIX was up a touch today, but more importantly, it has been firm at 86 since the end of May.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Glossary by ChatGPT

CDS (Credit Default Swap) — A derivative contract used to hedge or speculate on the credit risk of a borrower or debt issuer.

Gamma — An options Greek measuring the rate of change in an option’s delta as the price of the underlying asset changes.

Implied Volatility — The market-implied estimate of future price volatility embedded in option prices.

KRW — The currency code for the South Korean won.

Negative Gamma — A positioning regime in which dealer hedging can amplify underlying market moves by selling into declines and buying into rallies.

Put Wall — A strike price with substantial put-option positioning that can influence hedging flows and potentially act as a key market level.

SMH ETF — The VanEck Semiconductor ETF, an exchange-traded fund providing exposure to major semiconductor companies.

VIX — The Cboe Volatility Index, which measures the options market’s expectation of S&P 500 volatility over approximately 30 days.

VIX1D — The Cboe 1-Day Volatility Index, which measures expected S&P 500 volatility over approximately one trading day.

VVIX — The Cboe VIX of VIX Index, which measures the market’s expectation of volatility in the VIX itself.

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