The S&P 500 Has an Nvidia Problem

The S&P 500 has spent the past three trading sessions trying to find its footing following the sharp sell-off on November 5. From a volatility standpoint, there is still a little room for the VIX 1-day to decline further after closing today at 13.95. However, there isn’t much volatility premium left to unwind, suggesting the index may have some additional upside, but likely not much.

Meanwhile, the VIX index is roughly where it should be based on single-stock implied volatility, implied correlations, and the dispersion index. That suggests there is limited room for further compression in index-level implied volatility, meaning volatility is unlikely to provide much additional support for a sustained rally.

In the meantime, there isn’t much to point to at the index level, except that the SPY-to-RSP ratio is once again approaching a breakdown below support at 3.4. For now, we are still waiting to see which direction the ratio ultimately breaks.

The SPY-to-RSP ratio has largely moved in tandem with Nvidia, suggesting that where Nvidia’s stock goes from here will likely play a significant role in determining the ratio’s next move.

Nvidia is now sitting on the edge, with critical support around $165. A break below that level would likely deal a significant blow to the SPY-to-RSP ratio, potentially pushing it below its own support level. It’s difficult for me to envision a sustained rally in the S&P 500 without Nvidia participating. At this point, where Nvidia goes, the broader market is likely to follow.

Meanwhile, the 10-year Treasury yield rose sharply today following the hotter-than-expected CPI report, reaching 5%. The move appears to be a clean technical breakout, suggesting yields could continue to climb from here.

-Mike

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Glossary by ChatGPT

10-Year Treasury Yield: The annualized yield on a US government bond with a 10-year maturity, widely used as a benchmark for long-term interest rates.

Cap-Weighted Index: A stock market index in which each company’s influence is determined by its market capitalization, giving larger companies greater weight.

Dispersion Index (DSPX): The Cboe S&P 500 Dispersion Index, which measures expected differences in returns among S&P 500 constituent stocks using options-implied volatility.

Implied Correlation: The average expected correlation among index constituents inferred from index-level and individual-stock options prices.

Implied Volatility: The market’s expectation of future price fluctuations derived from options prices.

Relative Strength Index (RSI): A technical momentum indicator measuring the speed and magnitude of price changes on a scale of 0 to 100.

RSP: The Invesco S&P 500 Equal Weight ETF, which provides equal-weighted exposure to companies in the S&P 500 Index.

SPY: The SPDR S&P 500 ETF Trust, which tracks the market-capitalization-weighted S&P 500 Index.

SPY-to-RSP Ratio: A relative performance measure comparing the cap-weighted S&P 500 with its equal-weighted counterpart, often used to assess market concentration and shifts in leadership.

Support Level: A price area where buying interest has historically been sufficient to slow or reverse a decline.

Technical Breakout: A price movement beyond an established support, resistance, or trendline level that may signal a continuation or change in trend.

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

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

Volatility Compression: A decline in implied or realized volatility, often associated with reduced options premiums and changes in hedging activity.

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