Stocks closed higher yesterday, recovering from the previous day’s losses with a gain of about 1%. Nvidia (NASDAQ: NVDA) significantly contributed to this market movement, rising over 4%. A notable aspect of this rally was the trading of more than 3 million Nvidia call options, surpassing the 20-day average of 2.3 million contracts.
Despite the price surge, Nvidia’s overall trading volume remained around average levels, indicating that options trading played a larger role in its stock movement than direct share purchases. By around 2 PM, Nvidia’s trading volume had decreased, falling below its 20-day moving average. Additionally, much of the call volume focused on options expiring this week, suggesting that investors are seeking short-term gains rather than anticipating a prolonged upward trend.
There is a concern that, as the call volume diminishes, Nvidia’s stock price may lose momentum and decline, potentially affecting broader market indices like the S&P 500. Nvidia contributed nearly 25% of the Bloomberg 500’s movement, serving as a proxy for the S&P 500’s performance yesterday. In contrast, the equal-weighted version of the S&P 500 increased by just 24 basis points, highlighting a divergence between it and the broader market index.
S&P 500: Potential Gap-Fill Ahead?
The S&P 500 continues to experience unusual overnight futures trading patterns, with sharp rallies or sell-offs in the final trading hour often followed by gaps. Yesterday, following a previous day’s sell-off, the S&P 500 opened higher, continuing a trend where such gaps are typically filled in subsequent trading sessions.
USD/CAD Correlation with S&P 500
An interesting correlation has emerged between the USD/CAD exchange rate and the S&P 500. When the USD/CAD tops, the S&P 500 often finds a bottom, and vice versa. However, a notable deviation from this pattern occurred in January 2024.
Additionally, market liquidity appears to be strained, as reserve balances have not returned to pre-quarter-end levels, which could explain the current challenges in market conditions.
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