Weekly Update: Nvidia Continues to Lead the Market
Good evening, and welcome to this week’s edition of Stealth Trades!
Nvidia continues to defy all odds. Despite the historical precedent for leading stocks to fall after a stock split, NVDA went up another 9% this week.
A 9% move without news is a strong move for any stock. But for a $3 trillion dollar behemoth… it’s almost unheard. The company is worth $300 billion more than it was last week for no reason at all.
The activity we are seeing right now is the Dot Com Bubble 2.0. In the late 1990s, internet stocks soared in a bull market frenzy as investors chased the hot new thing. Qualcomm went up 2,619%. Yahoo, Intel, AOL and other internet stocks skyrocketed, leading to an 85.6% gain in the Nasdaq Composite index.
Today, the hot new thing is artificial intelligence, and Nvidia is the clear front runner. The stock is already up 170% year-to-date.
Since the indexes are market cap weighted (bigger companies have more impact), NVDA’s move has pushed the markets higher. The S&P 500 has a 13.9% gain for the year, making 2024 the best start to a presidential election year in history.
Another similarity to the Dot Com bubble is narrow market breadth. The bull market is being fueled by a small percentage of stocks. Nvidia alone is responsible for more than a third of the S&P 500’s gain this year.
The chart below shows the Nasdaq Composite index in blue above the percentage of stocks above their 200-day moving averages in white:
All things being equal, we should see these metrics move together. But over the last two months there has been a divergence.
The market is marching to new highs, but participation has remained stagnant. Only 55% of Nasdaq stocks are in long-term uptrends. Almost half trade beneath their 200-day average.
The advance decline line, shown in blue in the chart below, is also weakening.
Do not misinterpret this as a bearish signal. I do not expect the market to crash. I am simply pointing out where this market strength is coming from.
Traditional bull markets are easy. Everything goes up. Your only job is to pick which stocks will go up the most.
Narrower bull markets like this one are more selective. Traders must stay in tune with the theme of the market and focus on the names showing high relative strength.
Will there eventually be a major crash in AI stocks? Without question. But that could happen in 3 months or 3 years. As the saying goes, “Ride her ‘til she bucks you or don’t ride at all.”
More than half the leading market groups over the last 4 months are AI-related.
Semiconductors is the obvious one, but crypto is tied to this move as well since rapid improvements to processing power allows miners to be more efficient and profitable.
We are also seeing clean energy show up across the board as data centers struggle to power their operations on the outdated power grid. Expect to see nuclear-powered data centers become the norm in the years to come.
One way to play this is with a stock like NuScale Power (SMR):
The company builds advanced small modular reactors designed specifically to power AI data centers.
The stock is currently on the move. We own it in my Alpha Stocks service from $6.70, but I expect it to go much higher.
Following a brief consolidation in April and May, SMR broke out through the $7 area and is trending higher. In my opinion, SMR is buyable on any pullback to its 21 and 50-day moving averages.
It is a volatile stock, so don’t expect a quiet ride higher. But with a current market cap of just $2 billion, SMR could easily deliver a double from here.
Best wishes for your trading,
