Markets Give Up Gains Despite Strong Nvidia Earnings

Key Takeaways

• Stocks Are Struggling To Hold Gains
• Mortgage Rates Continue Climbing
• All Eyes On Jackson Hole

Markets opened Thursday and appeared set to move higher on the back of a stellar earnings report from Nvidia. However, the rally faded more quickly than Vanilla Ice’s haircut. Stocks gave up all their gains and then some to close down on the day. The S&P 500 fell 1.3% on the day and the Nasdaq Composite dropped 1.9%. Shares of Nvidia, which were the initial catalyst to the strong start Thursday, closed at just under $472, after having traded as high as $502.

Throughout much of this year, the rally has been led by the so called, magnificent seven: Alphabet, Amazon
AMZN
, Apple
AAPL
, Meta, Microsoft
MSFT
, Netflix
NFLX
and Nvidia. The concentration of gains in those stocks has worried a number of analysts because it means not all stocks participated in the rally. In fact, I made the point earlier this week about how the market would hinge on the performance of Nvidia. However, the losses of late have been wide spread. Yesterday, all eleven sectors in the S&P 500 closed down. That suggests something along the lines of a false bull market, or at least a weaker than it appears bull market, as some stocks we would expect to have participated in this year’s gains simply haven’t. I’ll give some examples of what I mean.

Shares of Disney closed down 3.9% Thursday and are down 5% this year. Nike
NKE
is down 17% year-to-date. Goldman Sachs is nearly 7% lower from where it closed 2022. In addition, throughout earnings season we saw a pattern of stocks that beat on estimates either held gains or moved ever-so-slightly higher. On the other hand, stocks that missed were punished. We saw that happen with Apple and are seeing it happen again this morning in shares of Gap
GPS
, which are indicated lower.

Another item of note this morning is interest rates. The yield on the 2-year note closed back above 5%. Rates on the benchmark 10 and the 30-year treasuries also moved higher. That has led to 30-year mortgage rates averaging 7.23%, the highest level they’ve seen since 2001. Tangentially related, mortgage applications dropped to levels not seen since 1995. I will point out, I don’t think it’s so much that the housing market is weak, as much as it is people with 3 or 4% mortgages do not want to move and buy homes where their rates will double. As a result, I think a lot of home owners are more or less stuck in their current homes and new home buyers are being priced out by a combination of higher rates and existing home owners not moving.

Speaking of interest rates, we will hear from Jerome Powell later today as the annual Jackson Hole conference wraps up. I’ll be listening for clues as to what the Fed is thinking ahead of their September meeting. As it stands, there is approximately an 80% chance rates will be left unchanged next month. However, trying to understand where rates will head after that is about as easy as understanding the menu at a Michelin Star restaurant.

Finally, I want to come back to Nvidia because I think there is an interesting lesson, especially for new options traders. Premium in Nvidia options was elevated heading into earnings. Therefore, even if you were right about the directional move and bought calls, it’s possible you still lost money because of the amount of premium paid. That was especially true for those who didn’t get out of long call positions early in the day, before Nvidia gave up its gains. This is why it’s important to keep positions small, as markets are incredibly efficient when it comes to pricing. As always, I would stick with your investing plans and long term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.