What the Quant Data Says About NVDA Before Earnings

I joined Frank Holland on CNBC Worldwide Exchange this morning (Aug 26) to talk about NVDA ahead of earnings. More on NVDA in a moment.

First, taking the news of the day – President Trump’s decision to remove Federal Reserve Governor Lisa Cook – why isn’t the market more reactive?  If there’s hand-wringing over “Fed independence,” one would think stocks would tank. 

You quantitative traders know that it’s not the way global electronic markets work (for more on how markets work, join the next live EDGE Demo Most volume runs on automated algorithms. If there are minimal Demand/Supply imbalances and no particular directional bias in derivatives bets or hedges, the market doesn’t move. 

And the market isn’t a monolith. There are different purposes and time-horizons behind price and volume. Price isn’t a metric. It’s a consequence of behaviors. The way we measure data at EDGE, in the S&P 500, which is 90% of US market cap give or take, about 10% of the volume is Active stock-picking. Roughly 28% at present is Passive flows like ETFs, around 42% is Fast Trading machines like Citadel, and 20% is derivatives.

Passive flows and derivatives have crept steadily up over the past year.  Why?  Follow the money.  Morningstar tracks monthly flows.  Blackrock, State Street, Fidelity and Vanguard had a combined $63 BILLION of inflows in July alone, while big Active managers MFS, T Rowe Price and American Funds (owned by Capital Group) had outflows of $15 billion. 

Stock-pickers are thus forced to sell things, while ETF managers are continuously looking to buy – and they mostly (90%) buy large caps.

ETFs added $2 trillion of assets over the trailing 12 months in the US, and assets are $12 trillion now. That’s money relentlessly directed at Target Date funds and other retirement and investment vehicles. 

Put the picture together.  Firms like Citadel set prices by “crossing the spread” to buy from one party and sell to the other between the bid and offer, taking a tenth of a penny from each side (and it could be just other high-speed traders).  Money flows to ETFs that use baskets of stocks as the pricing mechanism, a statistical sample.  Adding derivatives, covered-call strategies assets of which have exploded by more than 200% in the past three years, sell derivatives against assets to generate yield.

What would you see?  Narrow spreads, an upward bias to the market, and a lot of derivatives. Son of a gun.

Only ONE thing derails this market.  Falling prices. Go ahead and laugh! It’s true.  If prices fall, money stops flowing to equities and firms stop using covered-call strategies. Well, what causes prices to fall?  One thing. I don’t know what that one thing is! But it only takes one thing. 

Could it be NVDA?  I told Frank on CNBC that NVDA Demand is the weakest since May and Supply is about 55%. That’s a SHORT bias. Doesn’t mean the stock will fall. I can make a huge BULL case for NVDA.  But. It means there’s a Demand/Supply imbalance.  Historically, when Demand falls below 5.0, NVDA stalls or declines.  It last happened in May, though that was the end of an extended weak-Demand stretch.

So.  We’ll see.  It’s hard to derail the upward bias of relentless ETF flows. But it only takes one thing. 

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