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It is hard to believe that the S&P 500 is only 2–3% below its all-time high, given the carnage across various parts of the market. On Thursday alone, silver and Bitcoin plunged by roughly 20% and 13%, respectively. For now, the S&P 500 is holding near the 6,800 level, supported by gamma positioning, although that support can change on a daily basis. If 6,800 breaks, the next area of support would likely be between 6,700 and 6,720.
Given some of the post-earnings price action last evening, there is a good chance the index gaps lower.
At the moment, the VIX is not trading above the 3-month VIX index, meaning the market has not yet flipped into backwardation. That suggests implied volatility is rising across the curve, but we have not seen a true crescendo of fear.
Additionally, the dispersion index minus the 3-month implied correlation index remains at the upper end of its range, suggesting that the unwind has not yet begun.
At this point, the only thing that appears to be holding the market together is NVIDIA (NASDAQ:NVDA), which has managed to stay above $170 since July. That level is a critical area of support, and a strong case can be made that it represents the neckline of a head and shoulders pattern. A break below $170 would likely not only signal further downside for NVIDIA, but could also trigger a broader breakdown in the major indexes.
If you think about the market through a second-order lens, the current narrative is that AI is going to break the SaaS business model. The logical third-order question then becomes: if the SaaS model breaks, who buys AI models from the hyperscalers? And if the hyperscalers can no longer generate sufficient returns, who ultimately needs to keep buying GPUs from NVIDIA?
Ironically—or perhaps not—the software sector actually peaked ahead of NVIDIA. Now that software stocks are rolling over, the question is whether NVIDIA follows the same path.