Mid-week market update: The decline in the S&P 500 seems to have been arrested at its 20 dma (blue line). The next question is which price gap gets filled first. A fill of the upside gap (in grey) would be positive for the bull case, while a fill of the downside gap (in pink) would indicate that the bears have seized control of the tape.
As investors await the market’s verdict, here are some clues on how the future may develop.
Magnificent Seven
The Magnificent Seven seems to be leading the market upward again. While the S&P 500 shows upside and downside gaps, there is no outstanding upside gap in the Magnificent Seven ETF (MAGS), which has been in a relative uptrend since mid-October.
Magnificent Seven leadership usually translates into narrow market leadership, which would be cautionary flag. An analysis of the relative performance of the equal-weighted S&P 500 and Russell 2000 shows that smaller stocks are either flat or slightly outperforming the S&P 500, which is a healthy sign for the bull case.
The NVIDIA elephant
Then there’s the NVIDIA elephant in the room, which is scheduled to report earnings after the bell today. Without trying to forecast what might happen in the short-term, here are some big picture thoughts on NVIDIA.
First, the current AI mania sentiment cycle is not yet fully mature compared to the Tech Bubble of the late 1990’s. The stock price of Cisco Systems, which had been the internet darling of the day, had become disconnected from its earnings. By contrast, the stock price of NVIDIA is still keeping pace with its earnings.
To be sure, the pace of AI sales growth is expected to decelerate in the coming months. Hyperscaler capex is expected to grow in 2025 and 2026, but growth won’t happen at the same torrid pace as the past.
The bears will argue that this is a sign of impending disappointment. As well, we are already seeing accounting tricks, such as large company X investing a significant sum into an AI startup, and the AI startup turns around to use those funds to pay the parent investor for cloud and other services, which grows the parent’s revenues and valuation.
The bulls will argue that if this is indeed a bubble, which it probably is, we haven’t seen the low-quality IPOs and nonsensical deals that come to market as everyone rushes to cash in on the bubble. I can recall a peak internet mania episode during the privatization roadshow of ENEL, the Italian electric utility. ENEL was forced to sell off several power generation plants for anti-monopoly reasons. At the same time, the company had announced an initiative to build a fibre optic cable network using their existing cable infrastructure. The CEO was asked at an institutional roadshow in Boston the reasoning behind the fibre optic network plan. The replay was, “Well, we had to do something with the EBITDA we lost from selling the power generation plants.”
The room fell silent. The level of excess today is nothing link the late 1990’s.
From a tactical perspective, Renaissance Macro pointed out NVIDIA is their “buyer’s frenzy” indicator is flashing cautionary signs of excessive optimism going into the latest earnings report. Even then, the record of this indicator shows that too much bullishness has tended to resolve in flat price reactions, rather than large downdrafts.
My inner trader remains bullishly positioned. The NVIDIA report is a coin flip whose results I cannot call. But the stock is in a well-defined uptrend. Even if it were to disappoint today, its relative performance against the Magnificent Seven has been flat (bottom panel), and the stock market can continue to rise into year-end even under those circumstances.
As well, you can tell about the nature of market psychology the way it reacts to news. Equity futures fell overnight Monday when Russia rattled its nuclear sabre when it unveiled a news doctrine lowering the threshold for first use (see NY Times article for details). The market recovered during the day to close positive. Had it been ready to fall, the downdraft would have been far worse.
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I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Saw a study that says markets do well when Mcdonalds brings back the McRib. Coming Dec 14th. Get ready.
I think the S&P would need to take out 5700 to start thinking bearish. Gap fill at 5800, we still have higher lows and higher highs. But that gap probably should get filled, it’s a reaction to the election…that’s just sentiment.
I’d get really concerned if we took out 5100.
Market internal technicals are weak, while certain areas are going absolutely bonkers. Cryptos are blazing. Look at BTC. It behaves like 2021 TSLA now that we have funds and related options to trade. Yesterday IBIT fund started its option trading. Call/Put ratio is over 4. Expect BTC to continue upward and then a big drop at expirations. 2021 YOLO crowd were reborn and found religion. This type of pattern will go on under Trump admin. Best time to profit bigly.
Market also are into high risk-taking. Those speculative plays are all coming back, like ARK funds and fintech names. Certainly very exciting to relive 2020-2021 when all these names were flying high almost everyday.
It’s chaotic time. Many more declining issues than advancing issues. Big names are driving indices but very likely it will broaden out since $NYSI reading is so low.