Weekly Market Outlook
By Donn Goodman
February 28, 2023
Welcome Market Outlook readers. Happy late February. We are getting closer to the start of Spring and warmer weather. Hope you had a good and profitable week. Did you hang on to your Nvidia stock if you had any?
I couldn’t help but think about one of my favorite all time songs by Elton John, “Rocket Man” with a slight change in lyrics. Indulge me for a minute:
The Market packed my bags Wednesday, pre-flight.
Zero hour 4:00 p,m.
And I am gonna go high as a kite after then
I miss normal price earnings so much, I miss flat line
It’s lonely out in new high skies
On such a timeless flight
And I think it’s gonna be a long, long time.
Til touchdown brings me ‘round again to find
I’m not the stock they think I am,
Oh, no,no,no
I’m a rocket stock
Rallying out my valuation up here alone….
You may already be quite familiar with the Nvidia saga and perhaps, hopefully, you have been one of the many who have greatly benefited from this profitable trip to new space and new highs!
Nvidia shares surged Wednesday night after it reported blowout results that cemented Wall Street bets on the potential for its artificial intelligence technologies. The chipmaker also gave guidance well above future expectations, driven by AI spending at its biggest customers, including among many, Microsoft and Meta.
“The company is printing money at this point,” said Stacy Rasgon, an analyst at Sanford C. Bernstein. “And the prospect for continued growth from here still seems solid.”
Nvidia had been in pause or correction mode the prior 4 days down -8.7% before posting earnings and blowing away every analyst’s projection. Immediately after reporting earnings around 4:05 p.m. eastern time on Wednesday, the company’s stock rocketed higher up 9% in pre-market activity.
This trajectory continued Thursday, and the price of Nvidia stock ended the day up 16%, adding $277 billion in market capitalization and bringing the company close to a $2 trillion valuation. That addition eclipsed the $197 billion gain made by Facebook at the start of the month. It was the largest one-day historical gains in market valuations, we provide the following illustration below:
Thankfully, the release of spectacular earnings for Nvidia assured the market that the AI mania is still going strong. It also helped to make the stock price look cheaper. The bulls have now computed the stock’s new price-to-earnings ratio, or how much investors are paying for the future growth of the company’s revenue and if margins can stay astronomically high.
“Some investors have been scared to buy because they think the stock is too expensive, but that has been a huge mistake,” said James Demmert, chief investment officer at Main Street Research. “Every time it reports, the P/E shrinks because the E ends up being so much stronger than people expect,” Demmert went on to say. Our view is that with competition the margins will eventually decline over the next few years, and that will have a dampening effect on the stock’s price.
Perhaps more importantly, the NASDAQ 100 (QQQ) had been breaking down prior to Thursday’s market opening. It looked realistic that we could go into correction mode on tech stocks when Nvidia rescued the trend, turned things around, and got one of the largest one-day NASDAQ moves (up 3%). See charts below:
Wednesday’s close before Nvdia reported. QQQ looked weak.
One day later and then this happened (see chart below):
In the meantime, investor interest in Nvidia remains frenzied. While some have speculated that its success might be a bubble, most Wall Street analysts say its financial statements have been proof the product is viable. “Additionally, the growth of their core data center business is genuinely stunning”, Goldman Sachs Tony Pasquariello wrote in a note to clients Friday.
Because it is now so much more valuable, Nvidia’s financial results carry greater weight for the overall stock market, namely the S&P 500 index. According to Agati, the Chief Investment Officer of PNC Financial Services, 60% of the earnings growth among all S&P 500 companies for the most recent quarter came from Nvidia alone.
In other words, for the moment, as Nvidia goes, so goes the market. This is a positive for consumers who hold investments in the stock market whether individually, or through their retirement accounts. For now, “Nvidia has become critical to the market’s path forward,” Agati said in an email to NBC News, adding “In the saying ‘data is the new oil’, Nvidia continues to prove it is in a league of its own”.
Semiconductors continue to move upward.
As most of you are aware, MarketGauge was an early pioneer in developing formulaic, quant based (algorithmic) investment strategies that are built on proprietary technology. These algo formulas emulate any of the trading patterns learned by Keith, Geoff and Mish on the floor of the commodity exchanges and then trading for one of the world’s largest hedge funds (at that time).
It continues to surprise me that our Algos uncover investment ideas that frankly I don’t always agree with. MOST of the time, they are correct, and I am wrong. Many times, over the past few years (especially 2020 pre-covid) these Algos got out of the market and ever since have often been investing earlier than a market’s initial move up. (April 2020 and October 2023 are two such examples)
Yes, we rode Nvidia quite a long time in a few of our strategies just like we did in Tesla, Meta, the homebuilders and even travel cruise company Royal Caribbean. Interestingly we are still invested in several of these names or sectors through stocks or ETFs.
If you would like to know which ones or how we are currently positioned, reach out to Rob Quinn at Rob@MarketGauge.com.
Use the links below to continue reading about:
- The trend in semiconductors
- Nvidia’s next chapter
- The market’s high concentration in large caps
- A condition that has a 25-0 record for future bullish markets
- The Big View bullets
- Keith’s weekly video analysis
The market’s price action and news flow can be confusing and intimidating, but investing in this environment doesn’t have to be. If you would like personal guidance and hands-on management of your assets with the assistance of tactical, risk-managed, strategies, please contact me at donn@mgamllc.com or Keith at keith@mgamllc.com.
