Saqib Iqbal Ahmed
NEW YORK (Reuters) – The surge in shares of chip giant Nvidia Corp (NASDAQ:) is still having a major impact on the stock market, fuelling concerns that a change in the chip giant's fortunes could hurt the broader market.
Shares of Nvidia, which makes chips considered state-of-the-art for artificial intelligence applications, have risen 140% this year, accounting for about a quarter of the S&P 500's 17% gain.
Nvidia displayed its powerful dominance on Wall Street on Wednesday, as its shares rose 8.2% and helped the S&P 500 Index post its biggest intraday gain in nearly two years. The index reversed a 1.6% decline to close up 1.1%.
Nvidia's shares soared after CEO Jensen Huang signaled strong demand for the company's chips, boosting its market capitalization by more than $200 billion and accounting for 44% of the S&P 500's gain on the day, according to Nomura data.
Chris Murphy, co-head of derivatives strategy at Susquehanna Financial Group, said Nvidia's stock price rally “moved the whole market.”
The S&P 500 has struggled to rise on down days for Nvidia this year, with the chipmaker's shares rising just 13% of the time on days when the company's shares closed lower, according to a Reuters analysis.
The index hasn't risen more than 1% on a day when Nvidia's shares fell this year, and there have been 13 such instances in 2020.
For many investors, the recent moves have rekindled concerns about a small number of stocks that are driving market direction.
Microsoft (NASDAQ:), Apple (NASDAQ:) and Nvidia make up nearly 20% of the combined weighting of the S&P 500 index, but the first two companies' shares have not risen as much as Nvidia's this year.
Analysts said recent strength in non-tech sectors has stoked hopes of a broader rally, but a sustained sell-off in any of the big tech companies could deal a big blow to the broader market.
“If demand for Nvidia's products falls and the company weakens, the whole market will collapse,” Susquehanna's Murphy said.
Option Boost
Traders are keeping a close eye on Nvidia's options, which have played a big role in driving the stock's recent price movements.
Nvidia recently accounted for about 22% of total daily trading volume in individual stock options, up from about 5% at the start of the year, making it the most actively traded stock on the options market on most days, according to Trade Alert data.
Nvidia's gains are amplified when traders rush into upside call options. When buying of these options surges, the market makers selling these contracts are obligated to buy and deliver more Nvidia shares at the agreed-upon price, creating a “short gamma” situation in options jargon.
Additional purchases to cover the risk will push the stock price even higher.
“When the market is doing well, you definitely want to buy upside calls,” said Chris Weston, head of research at online brokerage Pepperstone Inc. “When times are good, those flows definitely make a difference.”
Nvidia isn't the first stock to have such a big impact on the overall market.
Nomura strategist Charlie McElligott said Tesla (NASDAQ:), another stock popular with non-professional traders, exhibited similar characteristics a few years ago when the options market amplified volatility in the electric-car maker's stock price.
But AI seems to have captured investors' imaginations even more than EVs.
“The excitement about the actual paradigm shift that AI is going to bring across the corporate world just makes it an order of magnitude bigger topic,” he said. “Tesla has never come close to that level.”
“AI is really its own animal,” McElligott said.
