Warning. Nvidia’s (NASDAQ:NVDA) recent swings, a rolling over of small-cap stocks, and historical market patterns heading into a presidential election have me concerned that volatility is on the verge of increasing. Add to that the potential for a currency crisis with the yen, and the stage is set for turbulence ahead.
And it’s going to be bumpy. Nvidia appears to (finally) have topped. The pace of inflows into NVDA stock — and tech stocks in general — can’t persist forever. Should Nvidia continue to fall, it would no doubt impact market sentiment given how big of a driver the company has been to the S&P 500’s performance this year.
It’s more than Nvidia though. Seasonality is about to kick in and it does not favor the bulls. Historically, the three months before a U.S. presidential election are often the most volatile of an election year, with the potential for a CBOE Volatility Index (VIX) spike. This year is no exception.
The political landscape is uncertain, and the political stakes have never been higher. Geopolitical tensions are rising, policy changes could be in the offing, and the economy remains incredibly uneven. Combined with breadth remaining quite poor, the setup exists for that historical seasonality to make for a more violent market.
The Bottom Line
All this of course is happening at the same time that there is a very real risk of a currency crisis with the yen. Imbalances have built up in global currency markets because of the yen’s weakness. If the Bank of Japan takes steps to intervene, such as by aggressively purchasing yen, we would see a surge in the currency. Such a sudden rise in the yen’s value would have unpredictable consequences and trigger the reverse carry trade.
Right now, it seems like we are in the eye of the storm. Most stocks are not performing well, Japan is a very real risk, Nvidia has largely driven the market’s gains, and volatility suggests complacency is dominant. How it plays out, and exactly when, I don’t know.
But the end point I believe remains the same. The crowd will be proven wrong.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
