Pro Perspectives 6/20/24





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June 20, 2024

In my last note we talked about the valuation on Nvidia. 
From the "Nvidia moment" in May of last year, the stock was up 3.6-fold at today's high. 
That said, as we've discussed, along the way the share price had actually gotten cheaper relative to its earnings power (i.e. the earnings growth has outpaced the even torrid share price growth).
But as we've also discussed, that dynamic has recently changed. 
Nvidia is no longer getting cheaper.  The quarterly earnings growth is slowing, while the share price growth has accelerated (amplified by the anticipation of and realization of the stock split).
And today we get what looks like the crescendo (for the moment). The stock put in a technical reversal signal (an outside day).  And unsurprisingly, with its disproportionate weighting in the major indices, the reversal in Nvidia contributed to similar signals in the S&P 500 and Nasdaq futures.  
Here's a look at the Nvidia chart … 
For market technicians, this is a perfect “outside day” reversal signal. This is when a new high is set in an uptrend, a buying climax, and the buying exhausts and weak speculative longs are quickly shaken out of positions forcing prices to lower lows than the prior day (closing near the lows).  A wide range (check) and significant volume (check) increase the likelihood that a trend reversal is underway. 
So, is this a negative signal for the broad market? 
Or does this signal a rotation, and broadening of market performance?
It looks like the latter. 
As you can see in this chart above, we've had divergence between the performance of the S&P (led by the big AI tech) and the Dow since mid-May.  Same is said for the S&P and Rusell 2000.
That divergence narrowed today.  
For some perspective on the significance of Nvidia's stock performance over the past year, and the "Nvidia moment," I want to copy in my note from May 25, 2023.  This is the day after Nvidia's game-changing Q1 earnings report last year. 
May 25, 2023


Nvidia neared the $1 trillion market cap level today.  


As I said yesterday, the Q1 earnings report, the incredible growth guidance for the rest of the year, and the discussion on customer demand for "re-tooling" for the generative AI transformation was a big wake-up call. 


Maybe the most important thing said yesterday:  The founder and CEO of Nvidia, the leading provider of technology that powers AI, said "when the ChatGPT moment came (the November 30, 2022 launch) … it helped everybody crystallize how to transition from the technology of large language models to a product and service…"  


That (ChatGPT) was the defining "moment" for the industry. 


We're just six months in. 


Just as the world is pondering recession, if not depression (and deflationary bust), this earnings call (the Nvidia moment) might be the defining moment for the rest of us — the moment that resets the perspective on the next decade, perhaps a boom period


The interest rate markets seem to be reorienting toward this.  The 10-year yield has risen from 3.27% to 3.60% in just two weeks. 


Of course, the narrative surrounding that has been "debt default."  But at the peak of the debt default frenzy, gold was on record highs.  It's now 6% lower, and falling.  The dollar is rising.  The Nasdaq just made another new high for the year.  


And the interest rate market has swung, over the course of one month, from pricing in an absolute certainty of rate cuts by year end, to about a coin flips chance – and, moreover, now pricing in the chance of another rate hike