Traders search for clues behind biggest S&P reversal since April

The most dramatic intraday reversal in the US stock market since April dragged benchmark indexes to their lowest levels in more than two months — all while leaving bewildered Wall Street traders scratching their heads about what exactly caused it all.

While there was no obvious catalyst to blame for a plunge of almost 5% in the Nasdaq-100 Index from its high of the day, theories for the selloff were piling up. The losses looked set to extend Friday, with Nasdaq 100 futures sliding 0.8% by 5:05 a.m. in New York.

Some traders pointed to resurfacing concern around whether artificial-intelligence projects are generating enough revenue or profits to justify the massive spending on the technology. To others, a strong delayed jobs report for September was the latest sign that the Federal Reserve is done cutting interest rates this year. Others said a risk-off signal sent by the drop in Bitcoin to a six-month low was partly to blame for the rout in equities. Worries about lofty stock valuations and an uptick in volatility heading into Friday’s options expiration were also cited.

Whatever the reason, the intraday slide wiped out an early feeling of optimism that US equities would continue a rebound from a selloff that followed the market’s last record highs near the end of October. What at first appeared to be a blowout earnings report from Nvidia Corp., the chipmaker at the epicenter of the AI race, and a quarterly update from Walmart Inc. that showed consumers are still spending were quickly overshadowed by a sudden, relentless bout of selling.

The momentum trade was particularly hit, with an index of long-short momentum stocks dropping nearly 5% on Thursday. The gauge has lost 16% since a peak last month, with Bitcoin proving the sentiment indicator for the trade. As the cryptocurrency space got hit, momentum stocks followed, also dragging on the Nasdaq 100.

For Goldman Sachs Group Inc. partner John Flood, Nvidia’s blowout earnings failed to deliver the “all clear” for risk that traders sought, instead sending them for cover against further losses.

Flood noted that since 1957, there have been eight instances, including Thursday’s, in which the S&P 500 opened more than 1% higher only to reverse and close in the red. On the bright side, average performance after those episodes was positive, with a gain of at least 2.3% in the following day and week and a 4.7% advance in the next month.

Meanwhile, the technical picture has also turned ugly. A bearish engulfing pattern — where a day’s losses fully erase the previous session’s advance — took shape on Thursday. It’s one of the most reliable technical warnings that sellers have seized control. The formation was unusually large and swift, echoing a similar setup in early March that preceded a 5% drop in the index.

After rising as much as 1.9% an hour into the session, the S&P 500 Index erased its gains to close down 1.6% as more than $2.7 trillion in equity market value was wiped out. The VIX Index, an options-based measure of expected volatility in stocks, closed above 26 for the first time since April.

The Nasdaq-100 gauge of tech giants led the stock market lower, ending down 2.4% and widening its decline from an Oct. 29 record to 7.9%. Tesla Inc., Alphabet Inc., Apple Inc., Microsoft Corp., Broadcom Inc. and Amazon.com Inc. each had swings of more than $100 billion in their valuations. A gauge of expected volatility in the Nasdaq 100 Index rose above 32 for the first time since April. The VXN, known as the VIX for tech stocks, spiked ahead of Friday’s expiration of an estimated notional $3.1 trillion in options, including $1.7 trillion of S&P 500 contracts and $725 billion notional of single-stock options.

Nvidia was the biggest drag on the Nasdaq 100, erasing an early 2.4% gain to drop 3.2% in a rout that wiped out almost $400 billion from its intraday high. Investors shrugged off the company’s stronger-than-expected revenue forecast amid resurfacing worries that spending on AI chips isn’t sustainable.

The S&P 500 has now declined more than 5% from its October record and has fallen below its 100-day moving average for the first time since February. The benchmark index closed at its lowest level since Sept. 11. Thursday’s selling was even more pronounced in the riskiest nooks of the stock market. A gauge of the most shorted stocks declined 3.5%, while a Goldman Sachs index of profitless technology firms lost 3.7%. The Russell Microcap Index fell 1.9%, widening its decline from a record to 10%.