Wall Street’s caution has been on the rise in recent weeks, with the S&P 500 rally slowing despite a new ATN of $5,067, with the main reason for holding momentum as dovish sentiment cools after data on steady US inflation.
After record demand for bullish calls, investors’ focus is on Nvidia’s Q423 report, with some experts warning that the report could be a stumbling block for the rally in US stock markets.
-According to some market experts, the euphoria in the markets is so great that the warning message is rooted that even the very fact that the company has already published its report could be enough to trigger a correction in the US stock markets, even if Nvidia’s result beats the market expectations.
Market sentiment points to EPS earnings reaching $4.59, up more than 700% from Q323.
-Consequently, demand for bullish out-of-the-money calls on large-cap US stocks is reporting at-distorted levels since the meme-stock mania in 2021.
-The term “out of the money” for an option applies when the exercise price of the option is above where the underlying stock or index trades, in the case of a buy, or below it, in the case of a sell.
-In the options market, the “skew” usually measures the demand for “out of the money” calls and “out of the money” puts.

There is one key difference between the meme stock era and the euphoria surrounding the options market, which is that traders’ exposure is currently concentrated in stocks that are heavily weighted in the major indexes.
According to strategists, Nvidia’s earnings could be a make-or-break moment for the markets, but the odds are against the chipmaker.
-Nvidia shares are up nearly 50% this year, the company contributes about 25% of the S&P 500’s 4.9% growth in 2024.
-According to investors, most of the rally over the past few months has been driven by aggressive stock buying, forcing market makers to hedge their positions with positions in the underlying stock.
The rally is about to turn after Nvidia’s earnings report
Market sentiment shows a drop in stock market volatility after Nvidia’s report, as when investors anticipate potentially market-moving market events that they want to hedge against or speculate on, volatility rises while when those events pass, it falls.
-Much of the tech sector is reporting similar extreme distortion in call options, such as Advanced Micro Devices, Arm Holdings ARM, Microsoft, as traders expect the euphoria surrounding Nvidia to have a positive impact on the broader IT sector.
A pullback is underway from the broader Wall Street as the options market has played a major role in driving the broader market over the past 4M, with the rally fueled by a boom in dovish expectations for the Fed over the year.
Breakthrough growth in Q423 leaves stocks trading at their highest levels against earnings expectations in more than 2Y, as major US indexes hit fresh ATN highs, while the Wall Street consensus for 2024. for earnings growth decreases.
-The S&P 500’s ratio of earnings expectations for the year exceeds 20 for the first time since 2022.
-Forward price-to-earnings ratio for the Nasdaq is even higher, reporting a growth of 26.
Technical picture

Nvidia remains close to ATN levels as long term sentiments remain bullish. However, the technical picture shows:
-Dem holds in the overbought territory after a slight reversal from the higher levels, observing a stretched sell signal that may have been exhausted.
-Seq with a completed cycle, after a print of up 13ka – a signal for exhaustion of the ascending impulse.
Megaphone’s -7 (bottom left) also supports running out of momentum.
-Sell signal (lower right) shows accumulation of sell traders.
A worse-than-expected Q423 report will strengthen sell-side influence on Nvidia, pushing the price towards a test of the 23.6FIBO levels. While a better result will shoot the chip maker to a new ATH.

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