Why does the market still "doze off" after NVIDIA's earnings report?

The “Super Bowl” of earnings season has just concluded. Nvidia (NVDA) delivered a results report in line with expectations, but its stock price after hours traded as if glued to the key psychological level of $200, unable to break through or fall below. Meanwhile, the VIX index (also known as the “fear index”), which measures market panic sentiment, showed a much lower one-day volatility increase after the earnings release than many traders anticipated, and opened sharply down near 9. This feels like a highly anticipated concert where the lead singer performs steadily, but the audience remains unusually calm, even yawning.

Behind this calm, there may be an important shift in market structure brewing. Once the most significant “boot” drops, the focus of the market is shifting from extreme individual stock performance to a more macro, and perhaps more boring, theme: “Dispersion Unwind.”

The Options Dilemma of “Buy the Expectation, Sell the Reality”

First, let’s look at Nvidia itself. Before the earnings, market sentiment was extremely bullish, with the options market especially active. Large sums of money were betting that the stock would break through the $200–$205 range after earnings. However, the reality was sobering. After the report, the stock hovered around $200, causing the value of many out-of-the-money options (especially $200 and $195 calls) to rapidly evaporate.

I recall a similar scenario during a tech earnings season in 2023. A star company beat expectations but its stock opened high and then declined, due to a gamma squeeze reversal—when the stock failed to break a key strike price, market makers hedging their positions sold aggressively, further pushing the stock down. Nvidia’s options chain situation this time resembles that. When the most optimistic expectations are unmet, the options market shifts from a “catalyst” to a “brake.”

Mid-Game Break After the Market “Show”: Dispersion Unwind Takes Center Stage

Why does Nvidia’s earnings seem to have made the market “boring”? It’s likely because the main driver of recent market behavior—the extreme divergence in individual stocks—is approaching a turning point.

Dispersion, simply put, is the difference between individual stock volatility and the overall market volatility. During the AI boom, we saw a handful of giants like Nvidia and AMD soaring ahead with high volatility, while many other stocks performed modestly. This high dispersion environment is a playground for active stock pickers and quantitative hedge funds. But such a state rarely lasts forever.

A key indicator now is the three-month dispersion and correlation spread (DSPX-COR3M). When this spread is high, it indicates significant stock divergence (high dispersion) and low correlation among stocks. Historical data shows this state tends to revert to the mean. In other words, implied volatilities of individual stocks gradually align with the market index’s volatility, leading to a decrease in dispersion and an increase in correlation among stocks.

In plain language: the “star solo act” may be coming to an end, making way for a “group chorus.” If dispersion begins to converge, then strategies that profited from long AI stocks and shorting weaker stocks over the past few months might face deteriorating returns. Capital could shift to sector rotation or revert to macro beta-focused trading, emphasizing overall market moves.

The Unseen Background: Massive U.S. Treasury Settlements

While markets contemplate style shifts, a technical factor is quietly humming in the background—massive U.S. Treasury settlements.

According to the scheduled settlement dates, about $137 billion in Treasury securities will settle in the coming days (including $22 billion on the earnings day, $37 billion the next day, etc.). While this large transfer of funds doesn’t directly mean money flowing out of stocks, it can impact short-term liquidity in the financial system, potentially increasing short-term volatility. It’s like a swimming pool where water is both being drained and refilled simultaneously—underneath the calm surface, currents are swirling.

I recall a similar liquidity disturbance during a quarter-end “rebalancing week” last year. Despite no negative fundamentals, the stock market experienced several days of low-volume declines at the close, largely due to institutional rebalancing and bond settlements working together. For short-term traders, these dates are calendar risks worth extra attention.

What’s Next for the Market?

Overall, Nvidia’s earnings may mark a temporary pause in a micro-driven dynamic. The market needs a new catalyst. This could come from:

• Further clarity on macro policies: The monetary policy paths of major global central banks, especially the Federal Reserve, will become focal points. Any hints about rate cuts or pauses could trigger a re-pricing of market styles.

• Earnings validation: The AI narrative can’t rely solely on Nvidia. The market needs more companies—whether tech giants or traditional sectors—to confirm their AI investments and revenue contributions in earnings calls, demonstrating the breadth and depth of the wave.

• Self-fulfilling dispersion convergence: As more investors anticipate and trade “dispersion convergence,” the process may accelerate. Funds might withdraw from crowded AI trades to seek other valuation opportunities, prompting a healthy sector rotation.

For investors, current strategies may need adjustment. Chasing high-priced, options-extreme superstar stocks carries changing risk-reward profiles. Instead, focus on two areas: first, sectors that could benefit from dispersion convergence (e.g., cyclicals or financials that are more sensitive to macro trends and have lagged); second, monitor volatility shifts—if the VIX remains low, it might be a good time to buy some “insurance” (like index puts) for portfolios.

Markets never stay euphoric forever. The current “calm period” is an opportunity to observe capital flows and adjust positions. When the choir begins tuning, the next song isn’t far behind. Of course, all judgments should be made with real-time market dynamics in mind—flexibility beats stubbornness at these liquidity and style transition nodes.