Stocks Rally Thanks To Surging Nvidia Options Volume

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#STOCKS: #NVDA

#MACRO: #SPX, #USDCAD, #RSP

Stocks ended the day higher, recovering all of yesterday’s losses and closing up by about 1%. Nvidia played a key role in driving the rally, climbing more than 4%. Over 3 million Nvidia call options were traded, well above the 20-day average of 2.3 million contracts.

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I point this out because, despite the surge in its price, Nvidia’s trading volume was relatively average today. This suggests that much of the stock’s movement is driven by options trading rather than traditional share purchases.

Additionally, we can see that by around 2 PM, the trading volume in Nvidia began to fade and drift below the 20-day moving average.

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The average trade size was also half the 20-day moving average.

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Meanwhile, most of today’s call volume was for options expiring this week. This suggests the stock is driven by investors scrambling to gain short-term exposure rather than speculating on a sustained upside. In a way, these investors are gambling on daily price fluctuations. The concern is that once this call volume fades, the stock price could revert to lower levels, potentially dragging the entire S&P 500 down.

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While the stock may appear to have technically ‘broken out,’ I guess once the call volume subsides, the stock will stall and revert to lower levels.

Nvidia accounted for almost 25% of the Bloomberg 500’s move today, which is a proxy for the S&P 500.

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Meanwhile, the equal-weighted version of the S&P 500 was only up by 24 basis points today, highlighting the divergence between it and the broader index on a day like today.

In the meantime, we continue to see these strange overnight futures trading patterns, resulting in frequent gaps after sharp rallies or sell-offs in the final hour of trading. Today was another example—after yesterday’s sell-off, we gapped higher. The pattern has been that these gaps tend to get filled relatively quickly.

An interesting development is that the USDCAD has weakened over the past few days. If you invert the USDCAD chart and shift the S&P 500 back by three days, you’ll see a strong correlation between the two. When the USDCAD tops, the SPX tends to bottom, and when the USDCAD bottoms, the SPX tops. The one notable exception to this pattern was around January 2024.

Finally, it is worth pointing out that, based on my model, reserve balances have not bounced back to levels before quarter end, which is why I think liquidity in the market has been so bad recently.

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Anyway, tomorrow is another day.

-Mike

Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.