S&P 500 Rallyes Ahead of Fed Minutes, Nvidia Report: What Now?

Stocks managed to rally yesterday, with the stock up almost 75 basis points, largely driven by the usual suspects. The rally in stocks continues as credit spreads tighten and financial conditions ease. This has allowed implied volatility to sell off and stocks to rise. The commercial mechanics are similar to what we observed in June and July.

Interestingly, the one-month implied correlation index rose yesterday and, in recent weeks, has fallen again to what has historically, in the last five years, been the lower limit of this index, and normally, this zone of 17 -19 mark short-term highs in the stock market. Some of those highs have been lower and, in some cases, higher. It is simply an indicator that tells us that we are in a range that could support a decline in stock prices.

Implied Correlation Index-Daily Chart

It may be rising because the one-month implied volatility of the seven major stocks in the index is declining along with that of the S&P 500. Thus, the correlation of implied volatility for stocks is going in the same direction as that of the S&P 500, which which means that they are more correlated with the index.

Furthermore, it has returned to the lower part of the range, being below 14 yesterday and trading around 13.5.

VIX-Hourly Chart

The CDX index of high-yield stocks has also returned to the lower part of its range, between 400 and 410 points. In the last two years, this level has supported the index and has set highs in the S&P 500. However, it must be taken into account that this CDX index of high yield stocks could also be considered a barometer of financial conditions, and when the index falls, conditions are easing.

CDX-Daily Chart

Thus, the drop below 400 points in periods such as 2020 and 2021 occurred during periods of relaxed monetary policy, while the periods in which there were peaks were during periods of stress or more restrictive monetary policy. Since we are in a period in which monetary policy is supposed to be sufficiently restrictive, I believe that the floor of financial conditions is higher than during periods of easy monetary policy. This implies that the CDX index could hold around this 400 level and start to rise again. A break above 400 points would be bullish for the stock.

CDX.NA.HY-Daily Chart

Now, today we will hear from the Fed, and based on the last three times we have heard from Powell, it seems likely to me that we will read about a hike in long-term rates, the need to ensure that rates remain at elevated levels longer time, and the discussion about where the neutral rate is in the economy.

If I had to speculate, these issues probably occur separately, but the three related indicators mentioned above are holding key levels and not breaking the lower limit. But now that I talk about it openly, I realize that the odds have gone a little against me.

NVDA US Equity BVOL Chart

NVDA US Equity BVOL Chart

Nvidia (NASDAQ:) results take center stage

Nvidia reports its results today, and the implied volatility of the calls is certainly higher than the implied volatility of the puts, suggesting that there is a lot of demand for Nvidia calls ahead of the earnings release. All of this implied volatility will fall today and will continue to fall after earnings are released, and that will mean that the value of both the calls and puts expiring this Friday will decline rapidly.

NVDA US Equity BVOL-Chart

NVDA US Equity BVOL-Chart


This will create an interesting dynamic for Nvidia, which likely means it will take better-than-expected results and guidance for the stock to rally following the results. Because with IV weighted towards calls, a flattening of volatility will lead to “over-hedging” by market makers on calls and not puts, meaning there will have to be a large number of buyers that nullify the dynamics of market makers to undo coverage.

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