Market Tumbles as Nasdaq Leads Decline, Nvidia Sell-Off Sparks Tech Rout

U.S. stocks kicked off September on a sour note Tuesday, with the Nasdaq Composite leading a sharp market decline as a massive sell-off in Nvidia shares sparked a broader rout in technology stocks. The Nasdaq plummeted 3.3%, while the small-cap Russell 2000 slid 3.2%. The S&P 500 fell 2.1% and the Dow Jones Industrial Average lost 1.5%.

The steep drop marked an abrupt reversal from the market’s recent rally attempts. On Friday, the Nasdaq had managed to close above its 50-day moving average, providing a glimmer of hope for tech bulls. However, Tuesday’s decisive breakdown sent a clear signal that the rally lacked conviction.

“On Friday the S&P moved into a power trend, hitting a lot of triggers and getting within 20 points of its all-time high,” noted a senior market strategist. “The thinking was that the S&P would move to new highs and pull everything else up with it. Instead, the S&P tumbled back, breaking through the 21-day line and testing the 50-day. Rather than leading on the upside, the Nasdaq led on the downside, completely shifting the market’s mentality.”

The S&P 500 finding slight support around the 4,500 level and its 50-day moving average provided little comfort to investors. With downside momentum building, many expect further weakness in the coming days. Even a modest 1% bounce in the Nasdaq or S&P 500 would do little to negate the technical damage inflicted.

While no single news catalyst could fully explain the harsh sell-off, an unexpectedly sharp downturn in Nvidia shares certainly contributed to souring sentiment. The AI chip leader, which has been a market darling and key driver of the tech rally this year, plunged 9.5% despite reporting another quarter of triple-digit revenue growth last week.

Nvidia’s decline alone erased around $78 billion in market value, marking one of the largest single-day market cap losses on record, second only to Meta Platform’s historic $232 billion wipeout in February 2022. However, Nvidia’s loss as a percentage of its market cap was far more contained at 9.5% compared to Meta’s 26% implosion.

Still, the magnitude of Nvidia’s decline, coming on the heels of a somewhat lackluster reaction to its earnings report Friday, dealt a severe blow to market psychology. Many had hoped Nvidia’s results would be strong enough to breathe new life into the flagging tech rally. Instead, investors now face the troubling prospect that the market’s most important stock may itself need a prolonged breather.

“Clearly there’s heavy volume selling on Nvidia’s daily and weekly charts,” observed one technical strategist. “The upside volume is much lower than the downside volume before the August selloff and now in this current downturn. This has been the most important stock of the market. If it struggles, that’s not a great sign overall unless leadership decisively shifts to other areas.”

The fallout from Nvidia’s stumble quickly spread across the semiconductor space Tuesday. The PHLX Semiconductor Index, a key gauge of chip stock performance, cratered 7.5%, with many of Nvidia’s chip peers suffering steep losses. Perhaps most worryingly, the SOX index sliced through key technical support levels, with its relative strength line undercutting the August 5th lows. The decisive breakdown suggests the long-time market leader may have far more repair work ahead of it before mounting another sustainable rally.

Troublingly, the carnage was not contained to tech alone. The iShares U.S. Aerospace & Defense ETF slumped 3.5% despite the group’s strong recent performance and defensive characteristics. The SPDR S&P Metals & Mining ETF plummeted 6% as key commodities like copper and silver came under heavy pressure. Even the Invesco S&P 500 Equal Weight ETF, a gauge of market breadth, slid 1.3%, underscoring the sell-off’s wide-reaching nature.

Against this backdrop, even stocks showing resilience had a difficult time withstanding the intensifying downside pressure. Fresh Pet, a recent market leader, opened strongly and briefly traded above last week’s highs. However, the stock steadily faded throughout the session, succumbing to the broader market downdraft despite its strong relative strength line. Cyber-Ark Software also retreated back below a recent buy point, though its shallow 1.5% pullback was quite respectable given the circumstances.

With the market uptrend coming under increasing pressure, investors’ focus is rapidly shifting toward capital preservation. Proactive selling, even among stocks showing relative strength, may be a prudent strategy in anticipation of potential further downside. While a near-term oversold bounce can’t be ruled out, the market’s technical deterioration suggests the path of least resistance remains lower for now.

Much will depend on the market’s response in the coming days. A decisive break below the Nasdaq’s 50-day line (currently near 13,240) would inflict further technical damage, likely inviting another wave of selling. The S&P 500 slicing through the round 4,500 level, coinciding with its 50-day line, would also be a bearish development.

On the upside, the indexes face a tall order to negate the recent damage. Ideally, investors would want to see a powerful follow-through day – a strong session with the Nasdaq or S&P 500 rallying 1.2% or more on heavy volume – to confirm a new market rally attempt underway. Until then, a defensive stance remains warranted.

Further complicating matters is the light earnings calendar this week, which shifts attention squarely onto economic data. The August jobs report on Friday will be closely scrutinized for clues about the economy’s health and the potential path of interest rates. The market’s muted reaction Tuesday to weak manufacturing and construction spending data suggests bad economic news may be at least partially priced in. However, an upside surprise on jobs or inflation readings could quickly reignite rate-hike fears.

Even if economic concerns don’t fully materialize, the damage to investor psychology from Nvidia’s decline may take time to repair. Many had looked to the chip leader as a barometer of overall market health, expecting its fundamental and technical strength to spearhead a sustained rally. With that thesis now under serious threat, investors appear to be coming to grips with the potential for a more extended consolidation phase than hoped.

To be sure, many market leadership groups – software in particular – absorbed the sell-off in relatively stride Tuesday. But whether they can continue decoupling if selling pressure intensifies remains an open question. While leadership often rotates during market corrections, finding new groups to quickly fill the void left by a tech pullback may prove challenging in the near term.

Ultimately, while one day doesn’t make a trend, the across-the-board technical deterioration Tuesday raised the bar significantly for reestablishing a bullish trend. With the Nasdaq and S&P 500 back below key technical levels and leading stocks rapidly ceding ground, caution remains the order of the day. Investors would be well served to prioritize downside protection over chasing rallies until the indexes and individual stocks can decisively prove themselves.

In summary, here are the key takeaways from Tuesday’s market action:

  1. The Nasdaq and S&P 500 suffered sharp technical breakdowns, jeopardizing the market’s recent recovery attempt.
  2. Nvidia’s 9.5% plunge dealt a serious blow to investor sentiment and sparked heavy selling across the tech sector.
  3. Key leadership groups like semiconductors showed accelerating technical deterioration, suggesting more repair work lies ahead.
  4. Selling pressure was broad-based, with defensive and commodity-linked sectors also suffering notable losses.
  5. Resilient stocks had trouble bucking the downtrend, underscoring the need for caution among investors.
  6. Economic data takes center stage this week, with the August jobs report on Friday now in sharp focus.
  7. Investors should prioritize capital preservation and risk management until the market can demonstrate a more convincing return to strength.