Bruised stocks face a week full of tests, from Nvidia to Powell

(Bloomberg) — Stock traders reeling from the worst market stretch since February face some pivotal events in the coming days, and Federal Reserve Chairman Jerome Powell’s closely watched speech may not be the biggest test of all.

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Ahead of Powell’s speech Friday at the Wyoming Fed symposium, traders will be looking at Wednesday’s important earnings report from Nvidia Corp. To set the tone. Expectations of a higher revenue explosion in May from the chipmaker, now the fourth-largest component of the S&P 500, helped ignite an AI rush that has supported the index’s nearly 14% advance this year.

Then Powell concludes the week. Typically, a Fed chair’s speech at the conference has buoyed stocks since the turn of the millennium, with the S&P 500 rising an average of 0.4% in the following week, according to data compiled by Bloomberg Intelligence. But the look of last year is still fresh in traders’ minds: Shares fell 3.2% in the week after Powell’s remarks, according to BI, after he warned against keeping politics tight to fight inflation.

The risk this time around is that it is tilting towards the possibility of further tightening this year, which could dampen the growth outlook at a time when concerns about China are mounting. It’s a scenario that would also jeopardize Wall Street’s earnings outlook, especially for high-flying technology stocks.

“Investors are betting on a narrative that inflation is under control and the Fed can claim victory, but it hasn’t become a reality yet — and that’s the biggest risk to the stock market,” said Stephanie Lange, chief investment officer at Homerich Berg. At the same time, “it will be difficult for this rally to sustain unless Nvidia can translate the power of AI into profit growth.”

Longer term, however, the Fed’s path is critical, with three policy meetings left in 2023. In the interest rate market, traders are leaning towards pauses next month and have priced in less than a quarter of a point hike for the next decision. in November.

A report on consumer prices this month showed that inflation was weak in July. But the strong retail sales data also showed that US consumers remain resilient, which could prompt the Federal Reserve to pursue more aggressive policy if inflationary pressures prove firm.

As the sell-off in US stocks gained momentum last week, with the S&P 500 index posting its first drop in three weeks since February, so did the appetite for options betting on further losses.

More than 25 million put options traded on US exchanges Thursday, the most since banking turmoil in March — while demand for calls remained at an average level, according to data compiled by Bloomberg. Action rose further on Friday when contracts linked to stocks and indices expired.

“The higher selling volume was a result of markets selling into a new range that is lower than what we have seen recently,” said Rocky Fishman, founder of derivatives analysis firm Asym 500, via email. “The closeness to the monthly expiry helped push it above the previous highs.”

The S&P 500 fell 4.8% in August, in pace for the worst month this year, and the Cboe VIX — a measure of expected volatility in the index — is near its highest level since May. While the weakness in equities hardly causes panic, derivatives traders certainly notice.

Data for Options Clearing Corp. analyzed by Citigroup Inc. Calls to open a position – seen as a measure of bullish bets – have fallen to an all-time low this year compared to offers to open a position. A similar trend can be seen in a broader gauge that also includes buying and selling as a measure of up and down bets.

This situation puts the Federal Symposium in a brighter spotlight. The setup to get into the meeting is “complicated,” says Denis Debuschery, president of 22V Research LLC, with rising Treasury yields putting pressure on long-term stocks and fighting inflation far from over.

“Don’t expect Powell to hand over the gavel as he did in 2022,” he said in a note to clients. “We don’t think Powell will change his tone away from data reliance, which won’t be seen as hawkish when yields are up and asset performance is down.”