Nvidia Blockbuster Triggers Historic S&P 500 Reversal
The size of the green-to-red reversal was near record, but the path to better technical conditions is paved with misery.
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The celebration of better-than-expected earnings, revenue and guidance from Nvidia (NVDA) turned into an ugly bull trap on Thursday. Analysts were gushing over the fantastic report and quickly raised price targets, which helped the stock jump around 5% at the open, but it was straight downhill from there. Nvidia finished down about 3% and is barely holding technical support around $180.
This action in Nvidia is a good illustration of how emotions and psychology, not news flow, drive price action. In a different context, the same news would have produced an enormous day for the indices, but nervousness and distrust are building. Once things weakened, there was a rush for the exits.
Green-to-red reversals of this magnitude are very rare. I see only five such instances in which the S&P 500 ETF (SPY) opened with a gap-up of more than 1.5% and then closed with a loss of more than 1%. One was in April, when the tariff tantrum was at its peak, and three were in 2008, when the financial crisis was at its peak.
The reversal this time was particularly demoralizing, as many bulls had predicted that Nvidia’s report would be the catalyst for positive seasonality and a new market uptrend. There wasn’t any surprise negative news or events. It was just a reassessment of AI and valuations.
While the action is very painful for investors, it is probably better in the long run from a technical standpoint. The gap-up open did not stem from a strong setup, and conditions were not conducive to a sustained rally. The market needs a deeper pullback and more skepticism and pain to create conditions for a new uptrend. The path to good technical support is paved with misery.
The good news is that many stocks with strong fundamentals and valuations are being unfairly punished. They can go even lower in this sort of market action, but when a turn finally does occur, it will be a feast for selective stock pickers.
My best advice is to protect capital and stay patient. Do not get sucked into the bottom-calling game. I wrote the same thing a few days ago, and the action illustrates why I offer that advice.
Market action like this is painful and depressing, but it should make you optimistic about the opportunities that will develop down the road.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
