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Nverse Nvidia

Nverse Nvidia

Posted June 27, 2024 at 11:30 am
Steve Sosnick
Interactive Brokers

Something strange happened over the past three days.  Key indices, the S&P 500 (SPX) and Nasdaq 100 (NDX) traded higher or lower along with Nvidia’s (NVDA) moves those days.  Or, should I say, they followed NVDA higher or lower?  It’s hard to say.  But on each of those days, key advance/decline metrics moved in the opposite direction.  Who’s driving this market?

Admit it, how many of you saw today’s headline and thought that this piece would be about an inverse NVDA ETF, such as NVD (GraniteShares 2X Short NVDA ETF)?  That’s understandable.  NVDA surpassed Tesla (TSLA) not only as the most active stock and options class on the IBKR platform several months ago, while NVDL, the 2X leveraged NVDA ETF, is consistently also among the more active stocks at our firm.  More importantly, NVDA and some of its other AI-related peers such as Broadcom (AVGO), AMD, and Micron (MU) better capture the market’s zeitgeist than TSLA these days.  As interesting as Elon Musk remains, Jensen Huang is much more the man of the moment.

The market’s reaction to MU’s earnings report is giving many of us pause this morning.  As I write this, that stock is over -7% lower despite beating street estimates on the top and bottom line.  The problem is that the company didn’t raise expectations sufficiently.  They dared only to match public expectations, not exceed them. 

This is a huge concern.  When you get a reaction like MU’s, where the numbers should be good enough to avoid a selloff, let alone spur a rally, that’s a bad sign – a tell that expectations are so high that they can’t be exceeded.  That said, NVDA has been able to do it consistently – making them a truly astounding company – but what happens if they do something similar to MU?  Would the act of merely acknowledging exceptional expectations rather than once again raising them lead to a significant downdraft?

This is a concern that we raised before each of the last two earnings reports from NVDA, and we are likely to raise it once again in late August.  Just because the risks have proved unfounded before doesn’t mean that they have disappeared.  If recent storms have failed to do damage in your area (thankfully), it doesn’t mean that the risk of future storms is now zero.  The risk remains.  And MU’s behavior today is a reminder of that. 

This is why I point out the odd market behavior that we’ve seen this week.  On Monday, NVDA was lower, along with SPX and NDX.  But NYSE and Nasdaq Advances/Declines were solidly positive (about 1.5:1).  Then, on Tuesday and Wednesday, the opposite occurred.  NVDA, SPX and NDX all rose, but both sets of Advance/Declines were negative by roughly the same margin as they were positive on Monday. 

Frankly, I’m not sure what, if anything, this means.   We have discussed the various divergences and weakening underpinnings of the current market for some time.  This is clearly among them.  It could also be a feature of portfolio managers repositioning ahead of tomorrow’s end of the quarter, as investors move from mega cap tech to value and vice versa.  Or it could simply be that NVDA is the Atlas holding up the whole market.

Heck, I’ve been saying for some time that “It’s Nvidia’s World, We’re Just Living (and Investing) in It”, or that “it’s Nvidia’s market and we’re all just trading in it.”  That’s very much been the case from the standpoint of major indices, but much less so when we look under the surface.

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4 thoughts on “Nverse Nvidia”

  • Yvan

    The NVDA current negative move, as precedent ones, mostly often wake up uncertainty, with losing substitution to comfort winning… That is all about questioning the market everyday, instead of managing it on long term. It depends on each individual mentality.

  • Nascence

    Seasonal effect exacerbated by megatech winnings. Quad witching means in this environment, risk off, take a profit. Guiding lower at this time of year makes it easier to beat next earnings, when it matters most. Not unusual at all. Summer is here, tuck it away into energy, utilities, bonds, cash, bills. Go sail. Read a book. Turn off the financial news. Forget.

  • JOE GERONIMO

    This article, without realizing it, points out the deficiency in techinical analysis and why it lost so much influence at major investment houses years ago buy then resurfaced, i think, only thru frustration of needing something else for guidance. What I refer to is the fact that this analysis system is always ‘looking’ back and then creates a call as to what probably happened and could/might have been seen if one had studied the chart really closely. This is total ‘withcraft’ and a mere ‘throwing of the sticks’ and should not be anyone’s basis for making an investment.

  • Dave

    NVDA disappointment the last few days, cannot move to green light, not sure if it’s good time to sell or hold.

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