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LivestreamMenuWednesday and Friday are likely to define the broader stock market’s direction this week. Nvidia is set to report fiscal second-quarter results Wednesday after the bell, with analyst estimates pointing to sky-high growth compared to the year-earlier period. On Friday, Federal Reserve Chairman Kevin Warsh will deliver a speech at the Jackson Hole Economic Policy Symposium. Both events come at a critical time for investors. While the major U.S. stock indexes are headed for solid monthly gains — the S & P 500 and Nasdaq Composite are up more than 2% each, while the Dow Jones Industrial Average has risen 1.9% — they are coming off a losing week as rising Treasury yields and inflation fears rattle traders. The backdrop has options traders bracing for sizeable moves after the Nvidia and Jackson Hole catalysts. “S & P options are assigning remarkably similar risk to both events, pricing implied moves of 67 [basis points] for NVDA earnings and 65bp for Jackson Hole,” wrote Barclays strategist Stefano Pascale. One basis point equals 0.01%, or 1/100th of a percent. Nvidia has been the stalwart for the artificial intelligence trade that has catapulted the broader market to all-time highs. But the stock is nearly 12% off its May 14 high, and has fallen for seven straight days entering Tuesday trading. On top of that, shares fell after the last four earnings releases. NVDA 5Y mountain NVDA 5-yr chart Put another way: If Nvidia can’t shake off its earnings day troubles, the broader market could take a hit. “NVDA’s current implied earnings move exceeds four of its last five realized moves. The risk is a large surprise recouples NVDA with the market, possibly compounded by a Warsh disappointment Friday,” Bank of America strategist Meriem Hafid wrote. As for Warsh, investors will look for clues on how the Fed can stem the recent rout in bond prices that has sent yields to multi-year highs. They will also listen for remarks on the Treasury Department’s recent moves aimed at easing yields. Barclays’ Pascale note that small cap stocks have shown “particularly pronounced sensitivity” to Jackson Hole. “Since 2018, the Russell 2000 has moved more than 3% in roughly half of all Jackson Hole episodes, including gains of 3.2% and 3.0% following the last two editions. By contrast, IWM options currently imply only a 1.0% move for this year’s event, slightly more than one-third of the average realized move observed in recent years, suggesting attractive value in owning optionality,” he wrote. Pascale advised clients buy the 298 IWM straddle expiring Friday.Read More
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