Your index fund got hit by the AI selloff this morning.
If you own an S&P 500 fund, you own a lot of AI whether you meant to or not. Seven stocks, Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta and Tesla, make up about a third of the index.
When they sell off, your fund sells off with them.
By this afternoon, the Nasdaq was down 3%, and the chip stocks got crushed. Around noon, option prices said the worst of it was over, and a few hours later they said something different.
I’ll show you why I think AI stocks are falling, and the one number in the options market that tells you if the selling is done.
Not Enough Money For The Build-Out
I believe this selloff is happening because the market does not have enough money to fund the whole build-out for AI. That’s what everybody’s worried about, I think, at least today.
Demand isn’t the question. Nvidia CEO Jensen Huang told CNBC that demand for neoclouds, the companies that rent out AI computing power, is “off the charts.” He also said capital is scarce, and that it’s slowing their growth.
Wells Fargo’s traders wrote that Huang’s comment about capital is “spooking markets.” They also said Meta’s comments about how much money it needs for AI rolled the stock over.
Meta beat on revenue last night, $64.6 billion, up 26%, and it plans to spend $135 billion to $145 billion this year. It also announced a new class of stock with no voting rights. Meta’s filing says those shares are “available for use for capital raising, employee compensation, potential acquisitions.”
In plain English, Meta built itself a way to sell more stock without giving up any control. When a company sells new shares, every share you already own gets a smaller slice of the company.
That goes for the Meta shares sitting inside your index fund, too.
Watch Where The VIX Closes
I spent 15 years making markets on the CBOE and Pacific Exchange floors, and I was there when the VIX was born. The VIX is Cboe’s fear gauge. It measures the implied volatility on S&P 500 options, which works like the price of insurance on the market.
When people get scared, they pay up for protection, and the VIX rises. It ran up this morning, then vol just went shoo, and this afternoon it pushed back above 20.
What matters to me is where it closes. If the VIX finishes at or near its high of the day, people are still paying up for protection into the bell, and they’re carrying that fear into tomorrow.
If it comes off the highs into the close, the people who needed protection already bought it. Then I think the selling is running out of steam, at least for now.
We’re not in perfect science mode here, but it’s a better read than a gut feeling. And you don’t need to own a single AI stock for any of this to matter, because your index fund owns plenty of them.
Licia Leslie goes live at 4:15 p.m. ET for the last of her free sessions this week. She’s covering candlesticks, how to spot when a trend changes and where the opportunities show up after a day like today.
Learn To Read Today’s Candles With Licia
Andrew Giovinazzi
P.S. This is Licia’s last free session, and she goes live at 4:15 p.m. ET, 15 minutes after the close. You’ll see how today’s selloff looks on the candles while it’s still fresh. Save your spot here.