The Nasdaq plummeted 5% intraday! The most severe volatility since April, what happened to the US stock market?

The U.S. stock market experienced its most severe intraday reversal since April on Thursday, with major indices falling to their lowest levels in over two months. Despite strong earnings reports from NVIDIA and Walmart, the market initially rose in the morning, but a sudden wave of selling wiped out all gains, leaving Wall Street traders puzzled about the true reasons behind the plunge.

Overnight, the Nasdaq 100 index plummeted nearly 5% from its intraday high, ultimately closing down 2.4%, with the pullback from the record high set on October 29 expanding to 7.9%.

The S&P 500 index rose 1.9% in the morning but then erased all gains and closed down 1.6%, with the market capitalization evaporating by over $2.7 trillion. Notably, the S&P 500 index has fallen more than 5% from its October record high and has dropped below the 100-day moving average for the first time since February, closing at its lowest level since September 11.

The VIX index, which measures expected volatility in the stock market, closed above 26 points for the first time since April.

NVIDIA became the biggest drag on the Nasdaq 100 index, rising 2.4% in the morning before closing down 3.2%, erasing nearly $400 billion in market value from its intraday high. Investors reignited concerns about the sustainability of AI chip spending, overlooking the company's better-than-expected revenue outlook.

Regarding the reasons for the plunge, some traders pointed out that the market is once again worried about whether AI can generate enough revenue or profits to justify the massive investments. Other traders believe that the strong non-farm payroll report in September is the latest sign that the Federal Reserve's rate-cutting cycle may be coming to an end this year. Additionally, some traders indicated that the risk-off signals released by Bitcoin dropping to a six-month low contributed to the stock market's decline. Furthermore, there are concerns about high valuations and increased market volatility ahead of Friday's options expiration.

Multiple Negative Factors Accumulate

Traders have offered various explanations for the plunge.

Brent Schutte, Chief Investment Officer at Northwestern Mutual Wealth Management Company, stated,

NVIDIA needs to be viewed in the context of many unresolved issues, **from a strong labor market, tariffs, inflation, and future actions by the Federal Reserve, to the sustainability of AI, stock valuations, private credit concerns, the pullback of loss-making tech stocks, and cryptocurrencies, among others. In short, investors are debating many unanswered economic and stock market questions **

The strong data from the revised September employment report has led some traders to believe that this is the latest signal for the Federal Reserve to end interest rate cuts this year. Bitcoin's drop to a six-month low is also seen as a sign of declining risk appetite. Frank Monkam, head of cross-asset macro strategy and trading at Buffalo Bayou Commodities, pointed out,

As cryptocurrencies enter a bear market, the cross-asset deleveraging cascade is not yet over. Cryptocurrencies are dominated by retail investors, who have been leading the market higher since spring—vulnerabilities are evident.

From a technical perspective, Goldman Sachs also noted that systematic trading strategies (CTA) are accelerating their sell-off. This strategy previously held extremely high long positions and has now breached short-term thresholds, approaching the mid-term threshold of 6456 points. If the market touches or falls below this level, it could trigger larger-scale systematic selling. On the other hand, liquidity is concerning; data shows that the liquidity top book value of the S&P 500 index is only about $5 million, far below the average level of about $11 million this year.

Valuation Concerns Overwhelm Positive Earnings Reports

Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, stated,

Although NVIDIA's performance is positive, it is not enough to dispel doubts about whether valuations are too high, and whether the recent shift to debt financing indicates that investment levels are too aggressive without sufficient attention to shareholder returns.

Goldman Sachs partner John Flood mentioned that this sharp reversal highlights that NVIDIA's earnings report, while exceeding expectations, failed to "disarm the risk alarm" as traders had hoped, instead prompting them to seek hedges against further losses. The market is currently battered, with investors overly focused on hedging against crowded market risks, fully in profit and loss protection mode.

Matt Maley, chief market strategist at Miller Tabak + Co., pointed out the core issue: "Can AI be as profitable as the market is pricing it? This is the key question. Traders are concerned whether today's AI investments will be profitable five years from now. Therefore, people are starting to say, 'I need to reduce my positions.'"

Craig Johnson, chief market technician at Piper Sandler, stated, "Investors breathed a sigh of relief after NVIDIA's earnings report. However, market breadth needs more time to stabilize and begin to recover."

High-Risk Assets Hit Hard

Thursday's sell-off was particularly evident in the riskiest areas of the stock market. The most shorted stock index fell by 3.5%, and Goldman Sachs' unprofitable tech company index dropped by 3.7%. The Russell Microcap Index fell by 1.9%, widening its pullback from record highs to 10%. The market capitalizations of Tesla, Alphabet, Apple, Microsoft, Broadcom, and Amazon all fluctuated by over $100 billion.

The Nasdaq 100 index's expected volatility indicator, VXN, rose above 32 points for the first time since April. This volatility occurred ahead of the expiration of approximately $3.1 trillion in nominal value options on Friday, including $1.7 trillion in S&P 500 contracts and $725 billion in single-stock options Scott Rubner, Head of Stock and Equity Derivatives Strategy at Citadel Securities, stated, "These mechanical outflows may remain strong in the coming days and then completely dissipate."

Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna International Group, pointed out, "With NVIDIA's earnings report concluded and the Federal Reserve unlikely to cut rates in December, investors are beginning to question what else can drive a year-end rally. CTA (Commodity Trading Advisors) positions remain fragile; systematic strategies are still slightly net long, and a deeper pullback may force further selling."