Why I am hoping for an NVIDIA wipeout

Mid-week market update: I am publishing the mid-week market update early for two reason. I wanted to respond to the recent market turmoil. And I have a dental appointment just after the market close so this will be in your inbox early.

The markets have taken a sudden risk-off tone in the last few days. Growing concerns about valuation and skepticism about the AI revolution is feeding those worries. Bloomberg published an article with the catchy headline “Stocks Face Sell Signal as Cash Holdings Drop in BofA Survey”:

Investors’ cash positions dropped below a critical threshold in a monthly Bank of America Corp. survey, triggering a so-called sell signal for equities at a time of rising doubts around lofty technology valuations.
 

The average cash held by global fund managers fell to 3.7%, something that has only occurred 20 times since 2002. Stocks declined and Treasuries outperformed in the following one-to-three months each time that happened, strategist Michael Hartnett wrote in a note.

 

 

The big sources of volatility this week is the NVIDIA earnings report Wednesday after the close, followed by the much delayed October Payroll Report Thursday morning.

As the market turmoil continues, I am hoping for a wipeout from the NVIDIA report, as that could represent the wipeout market low which represents a buying opportunity.

There are market warnings everywhere you look. As the growing chorus of breadth divergences grow, we have seen a cluster of Hindenburg Omens, which describe a bifurcated market that’s turning down from an uptrend. The resolution of past Hindenburg Omen clusters have tended to tilt to the downside. Most eventually resolve in pullbacks (pink), but a few signals (grey) were benign.

 

Investors will see NVIDIA report earnings after the close on Wednesday. The last few reports saw negative reactions. Will this week be the same?

 

Much will depend less on whether the company beats or misses Street estimates, but its forward guidance. Stocks have seen better price reaction to positive guidance than to EPS and sales surprises.

 

 

Sources of Hope

Nevertheless, there are sources of hope if you know where to look. The monthly BoA Global Fund Manager Survey’s cash levels make interesting headlines, but there are some internal contradictions to the survey results that suggest a contrarian bullish view. Consider that while global fund managers are spending down all that cash, they rotated into defensive plays (healthcare, bonds, staples) and out of cyclically sensitive industries (industrials and discretionary). Tech, which are supposed the high-beta darlings, was also sold.

I recently highlighted the dislocations in the money markets. Banking system liquidity is tightening and creating a headwind for risk asset prices. That situation should improve in the near-future for two reasons. First, the U.S. government shutdown is ending, and the Treasury had been accumulating a balance in its Treasury General Account as tax revenues rolled in but little rolled out because of the shutdown. As the shutdown ends, the government will spend down its TGA balance, which injects liquidity into the financial system.

In addition, the Fed is becoming concerned over banking system liquidity. Michael Howell highlighted a Financial Times article of a special meeting with Wall Street banks last Friday. The Fed has signaled that it’s prepared to pump liquidity into the system, which should boost asset prices. The indicator to watch is the price of Bitcoin, which is a real-time indicator of liquidity.

Two of the five components of my Bottom Spotting Model triggered based on Monday’s closing values, and a third have triggered on an intra-day basis today. The VIX Index spiked above its upper Bollinger Band and the NYSE McClellan Oscillator reached an oversold reading Monday. The term structure of the VIX is inverting today, indicating panic. In the past, two or more simultaneous triggers have marked tactical bottoms.

 

As well, the Zweig Breadth Thrust Indicator reached an oversold level today on an intra-day basis. Oversold readings in the ZBT Indicator in the past year have signaled positive risk/reward buy setups.

 

To be sure, oversold markets can become more oversold. That’s why I am hoping for an NVIDIA wipeout and sentiment flush as a buying opportunity. My inner trader is dipping his toe in on the long side, and he is prepared to add to his long position should we see a panic sell-off on Thursday.

Disclosure: Long SPXL