MARKET WRAP

A bit of an acceleration to the recent selling today. The morning started with stocks trying to rebound, and Nvidia a bit higher following earnings. But once again, tariff headlines derailed the attempt, while NVDA reversed nearly 13% from its morning highs to finish -8.5% on the day. Revisions on prior inflation data and initial jobless claims also had some market participants talking the dreaded stagflation. For the day, SPX -1.6%, QQQ -2.75%, IWM -1.5%. The 10y yield was a tad higher today now 4.27%. The VIX is now 21.25 (more on where we are volatility wise at the bottom of the email). Tomorrow morning we get Jan PCE.

On today’s shows:
Liz joins Guy and Dan on MRKT Call to talk stagflation, high yield bonds, small caps vs treasury yields and more. On today’s RiskReversal Pod Gene Munster joins Dan to pour through NVDA’s report, Apple’s shareholder vote, and more.

MRKT MATRIX: February 27, 2025

Today’s Top Stories:

• S&P 500 falls, continuing February decline, as Trump affirms tariffs coming and Nvidia tumbles (CNBC)

• Trump says Mexico, Canada tariffs will start March 4, plus additional 10% on China (CNBC)

• Small-Cap Stocks' Gloom Deepens as Executive Sentiment Sours Too (Bloomberg)

• From Egg Prices to Housing, US Inflation Is Heating Up Again (Bloomberg)

• US Eggs Hold Steady to Snap 56-Day Streak of Higher Prices (Bloomberg)

• How Nvidia Adapted Its Chips to Stay Ahead of an AI Industry Shift (WSJ)

• Microsoft Urges Trump to Overhaul Curbs on AI Chip Exports (WSJ)

• Google Search Changes Upend Publishers’ Product-Review Sites (WSJ)

• Big Money Flocks Back to Levered Trade That Went Bust in 2008 (Bloomberg)

• Number of 401(k) Millionaires Rose 27% in 2024, Fidelity Says (Bloomberg)

Today’s MRKT Call is Presented by SoFi

Welcome to the Stagflation Party

The episode kicks off with the latest tariff headlines, as Liz questions whether market participants are underestimating their impact. Guy highlights historically low bullish sentiment, despite the market being just 3-4% off all-time highs. The team then reviews recent earnings and the SPX chart before shifting focus to the 10-year yield, where Liz breaks down the Fed dot plots and potential miscalculations by the FOMC given recent market shifts. Dan predicts that tariffs may not take effect next week, while Liz takes a deep dive into the recent moves in High Yield Bonds.

The discussion then turns to how Treasury yields and small caps are now moving in sync due to shifting dynamics in the bond market. Finally, the show wraps up with a look at the banking sector, with a focus on Goldman Sachs (GS).

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Today’s RiskReversal Podcast is Presented by Betterment and RBC

Gene Munster: Nvidia Earnings Key Takeaways

Dan Nathan and Gene Munster delve into the disappointing near-term guidance for Nvidia, Apple's shareholder meeting and the impact of geopolitical factors on its stock, and Tesla's challenges amidst a three-year price war and competition in the EV market. The conversation also touches on Microsoft's underperformance and its AI strategy. Gene shares his insights on the long-term potential and current market expectations for these tech giants.

• Timecodes 

• 0:00 - Nvidia Earnings

• 10:53 - Apple Shareholder Vote

• 18:12 - Tesla & Microsoft

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What’s Next?

For the past weeks we’ve discussed the significant options open interest that built up between the 6000 to 6150 level. Some of those sold calls went as far back as pre-election positioning, and as the market continued to go sideways, the gamma built as similar strikes continued to get rolled, reaching as far as the end of March in large supply. As the market traded largely sideways that heavy overhead supply made it difficult for the SPX to break out. At the same time, moves lower were fairly confidently bought and the self fulfilling effect grew.

Now, after another failed attempt at the highs and multiple failed bounces at the very recent lower band near 5950, it’s time to reassess where we stand:

• Options & Gamma Positioning:

  • The 5950-6100 range acted as a magnet for months, but now that SPX is pulling away from those levels, we’re entering more of a “no man’s land.”

  • Traders had little incentive to reach for protective puts during the tight range trading.

  • Where traders have owned puts were very far out of the money. The key level where put positioning is significant is much lower—in and around 5700 SPX.

• Potential Market Reaction If Selling Continues:

  • Most participants are likely under-hedged for a further 200-300 point drop.

  • If selling pushes us below the current levels over the next few days, demand for nearer-term puts will spike, likely leading to:

    • An accelerated SPX decline

    • A significant VIX surge

    • If SPX drops more than XXX tomorrow, VIX could hit 30, as traders scramble for closer to the money protection into the weekend.

• Key Levels to Watch:

  • A 5%-6% pullback from recent highs could mark a short term capitulation event, where a sharp drop is followed by a rebound.

  • The first 4% of this move has been fairly orderly, but if the decline continues, expect more disorderly price action for the next 200-300 pts.

  • Keep an eye on the 5850 level because it may be the options market last help until closer to 5700.

The factors above were significant in deciding the strikes for the SPY hedge detailed here on Feb 20th. Here’s a recap:

^{Possible SPY Hedge – March 31 Expiration - This options trade is designed as an inexpensive hedge against a moderate market decline in SPY while allowing flexibility to stay engaged on small pullbacks or if the market continues higher. It provides protection from a ~2% to ~7% downside move from current SPY levels, with limited cost if the market remains strong.}

• ^{Trade Structure:}

  • ^{Buy 1x SPY March 31st 595 Put for ~ 4.70}

  • ^{Sell 1x SPY March 31st 565 Put at ~ 1.70}

  • ^{Total Cost: $3}

  • ^{Potential Gain / Protection: $27}

That spread is now worth about $10. In the initial post we wrote at the time:

_{The trade is fairly short term, and if we did see a decline near term (following NVDA’s earnings for example)  it could easily be rolled at a profit farther down and out in time while potentially booking some profits on the hedge. Roughly speaking, if SPY was 575 after the first week of March, this would be trading somewhere around $14 dollars.}

If we do see a flush below here towards that $575 SPY level we’ll update, as well as if the market holds and it looks like it needs to be rolled to new strikes to preserve its original intentions.

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