NEW YORK, Sept 13 (Askume) – The sharp rise in Nvidia ‘s (NVDA.O) stock price is still having a big impact on the S&P 500 index (.SPX) , raising concerns that the chip-making giant’s fortunes could turn around. The market could suffer.
Shares of Nvidia, whose chips are considered the gold standard in artificial intelligence applications, have soared 140% this year, accounting for about a quarter of the S&P 500’s 17% gain.
Nvidia performed strongly on Wall Street on Wednesday, with its shares rising 8.2% and helping the S&P 500 post its biggest intraday gain in nearly two years. The index reversed a 1.6% decline and ended the day up 1.1%.
Nvidia shares soared after Chief Executive Jensen Huang announced strong demand for the company’s chips, boosting its market value by more than $200 billion and helping the S&P 500 add more than $200 billion to its value that day, contributing 44% to the rise, according to Nomura data.
Chris Murphy, co-head of derivatives strategy at Susquehanna Financial Group, said Nvidia’s gains “surprised the entire market.”
The S&P 500 has struggled to move ahead of Nvidia’s downtrend this year, with the chip maker’s shares rising just 13% as the day closed weak, Askume analysis shows.
This year, whenever Nvidia’s shares have closed lower, the index has not risen by more than 1%. There were 13 such cases in 2020.
For many investors, recent trendsThe new concern is that a small group of stocks determines the direction of the market.
Microsoft, Apple and Nvidia have a combined weighting in the S&P 500 of about 20%, though the former two have seen their share prices rise much less than Nvidia this year.
While recent strength in non-tech sectors has raised hopes of a broader rebound, a sustained sell-off by any of the tech giants could hurt the broader market significantly, analysts said.
“If Nvidia falters because of low demand for its products, the entire market will struggle,” Susquehanna’s Murphy said.
Add options
Traders are keeping a close eye on options on Nvidia, with the company playing a major role in driving the recent move higher.
Trade alert data shows that Nvidia has recently accounted for about 22% of the total daily trading volume of individual stock options, up from about 5% at the beginning of the year, making it the most actively traded stock in the options market.
When traders participate in call options, Nvidia’s profits increase. When the buying volume for these options increases, the market makers selling these contracts are obligated to buy and deliver more Nvidia shares at the agreed price, which, in options language, is “short gamma.”
Additional buying to cover the risk pushed the stock price higher.
“You see, when markets are bullish, people are eager to buy rising call options,” said Chris Weston, research director at online broker Pepperstone. “When markets are hot, these flows definitely have an impact.”
Nvidia isn’t the first stock to have such a powerful effect on the rest of the market.
Tesla, another favorite among amateur traders, showed similar characteristics a few years ago when options markets favored the electric carmaker, boosting volatility in automaker stocks, said Nomura strategist Charlie McElligott.
But it appears that artificial intelligence is capturing investors’ imaginations even more than electric cars.
“The real paradigm shift that artificial intelligence represents in the enterprise world is the craze that makes it a big topic,” he said. “Tesla has never even come close to that.”
“Artificial intelligence is a different animal,” McElligott said.
