An early stock market rally fueled by Nvidia’s earnings turned out to be a mirage on Thursday.
The Nasdaq Composite sank 2.2%. The S&P 500 fell 1.6%. The Dow Jones Industrial Average dropped 386 points, or 0.8%.
At one point, the Nasdaq was up 2.6%, while the S&P was up 1.9% and the Dow was up 1.6%; all three indexes marked their largest reversal from an intraday high to negative territory since April 8, according to Dow Jones Market Data.
“This morning’s stunning reversal is a sign that market psychology has become quite brittle,” writes Steve Sosnick, chief strategist at Interactive Brokers. “If investors were truly enamored with NVDA’s results and the assurances about the lack of an AI bubble, then by no means would we have succumbed to an algorithmic quirk so quickly. We might have seen a bit of a blip lower but carried on nonetheless. Instead, we got a complete reversal and then some.”
Nvidia closed down on the day after rallying after earnings. Though the numbers were good, there were some doubts on Wall Street as to whether stellar numbers could overpower recent worries about artificial intelligence valuations, Mizuho’s Daniel O’Regan told Barron’s.
“The AI narrative near-term is still somewhat mixed, rightly or wrongly,” O’Regan says. “Long term it seems extremely intact, but it’s tough to change mindset, especially retail, near term.”
The market, especially riskier stocks, followed a big drop in bitcoin. Sosnick suggests that trading algorithms may be acting on a relationship between stocks and Bitcoin.
“Traders have always sought to find relationships between asset classes, and there are teams of skilled quants who pore through data, both long- and short-term, seeking inputs that guide their decisions,” Sosnick writes. “We called them ‘leads.’”
Sosnick notes Bitcoin has been a lead for the Nasdaq 100 in recent days.
“While correlation is not causality, that can become the case if traders large and small are using that as a basis for their decision making,” he writes.