Nvidia, Are We at the End of the Line?

If you are thinking long-term, the answer to the question asked above is, "probably not." Artificial intelligence, whether seen as a bane or a blessing, is here to stay -- and Nvidia (NVDA) is obviously going to be a major player. However, if you are living in the here-and-now, you may see that the group of big techs and this company may be a bit out over their skis. Friday’s action may be a precursor to some give-back and potential underperformance.

To set the stage it is important to remember that Nvidia, as part of the ‘Magnificent 7,’ has been a stellar performer, up 262% in the past 12 months and 75% since the first of the year. A ton of good news and potential earnings has been discounted by this latest price action. The real worrisome aspect of this came on Thursday, March 7, when Mizuho Securities raised its price target on the company to $1000 from $850.

The stock, which had closed the previous session at $885, popped $41 to close at $926. On Friday morning, Nvidia ran up to $974, just $26 away from Mizuho’s new target. Most research firms normally establish targets to be attained over a 12-month period, not 48 hours.

The action in the stock was not atypical of what we saw atop the Y2K tech bubble, via targets set by Henry Blodget and Mary Meeker. The violent upside volatility on these analysts’ calls on internet stocks turned out to be a precursor of a serious bubble bursting. What came next was a red flag to many technical analysts, a “key reversal day.”

Beware: The Key Reversal Day

According to StockCharts, a key reversal equals “a one-day chart pattern where prices sharply reverse during a trend. In an uptrend, prices open to new highs and then close below the previous day’s closing price. In a downtrend, prices open lower and then close higher. The wider the price range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place.”

So, how does the attached definition stack up versus the action seen in Nvidia's stock on Friday? Nvidia has been in a sharp uptrend (parabolic). It opened sharply higher (+5%) at a new all-time high, reversed, and then closed down 5.5%.

It did so on twice the normal trading volume. In the late trade, the stock traded down another 2.8%. Again, I cannot guarantee if the negative price action continues from here, nor can I tell you ‘how low is low,’ but odds are Nvidia's halcyon days are over for a while.

This does have implications for the ‘Magnificent 7’ (AAPL, TSLA, NFLX, AMZN, GOOG, MSFT, and META). In every one of these stories, there may be AI component (software) sales that might contribute to their future growth and earnings, or they are companies whose use of AI tools might strongly contribute to their efficiency and profitability. If the lead dog, Nvidia, goes lame, it is likely to effect the performance of the this highly over-owned team of companies.

Safe Bets

Before and since the Fed began to ratchet up rates, “big tech” has been considered bulletproof (a safe place regardless of valuation) in a market where the pundits have consistently believed a recession was just around the corner. As such, on Jan. 30, 2024, the Magnificent 7 constituted 30% of the market capitalization of the S&P 500 ($13.2 trillion out of $44 trillion).

Anything with economic sensitivity has been ignored. I mean, why own that stuff if we are heading into recession? This whole line of thinking may be in the process of reversing.

Take the tech-heavy QQQs, for example. On March 8th, that ETF was down 6.43% during regular trading and declined another 1% in after-hours trading. This is versus the S&P 400 Mid-Cap Stock Index moving down 0.54% and the Russell 2000 falling down 1/10 of 1% at the close. 

My main point is that the big tech sector does not look to be the safe bet right now. Sure, they will be around, but past is not necessarily prologue, especially if the economy continues to roll along.

It’s Time for the 'Also-Rans' to Shine

I define ‘also-rans‘ as small-cap stocks (often considered vulnerable and lacking the ability to get credit or equity in hard economic times), mid-cap growth and value stocks (which are also vulnerable to economic hard times, and maybe not growing fast enough), and perhaps the other 493 stocks in the S&P 500 trading at an average multiple of 15.5 x forward 12 month earnings (as of Jan. 9, 2024). 

There is a lot to chose from. Just as many have totally given up on stock picking, we are now being presented with the opportunity of a lifetime to do the work, participate through the use of ETFs, or let an actively managed fund with a credible record take on that responsibility in your portfolio.

If the Magnificent 7 group does begin to come apart at the seams, hang in there. It will not be due to the economy falling apart, but rather the downside of risks posed by extreme concentration and over-valuation. It’s a market of stocks -- not just 7 stocks, but a vast number of choices. It’s time to take advantage of the herd plowing into big tech.

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