Rocket Stock. Changing History?
What 3 or 4 Good Months in Row Means?

February 25, 2024

Weekly Market Outlook

By Donn Goodman


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 [email protected]

Last weekend one of our investment strategies that had a position in cash signaled to go back into Semiconductor stocks (we had already been invested in semis in other strategies).  I questioned it and then Tuesday/Wednesday there was apparent weakness in the semis.  Was I correct to be skeptical?

We all know that the move alone on Thursday was one of the biggest NASDAQ moves and it especially benefited the semiconductor industry.  That ETF we bought into (the more aggressive levered USD) was up 18.5% on Wednesday and the more conservative SMH that we have owned since December 13, 2023, is now up 23.95%.  Below is a chart showing the recent parabolic move of SMH as it makes one new high after another.

Even more interesting is the following chart I which shows that we may still have plenty of upside in the typical bullish semiconductor uptrends.

Taking a deeper dive into the stocks that are leading the market higher in 2024, you will notice that the semiconductor stocks like Nvidia and the ETF SMH are at the top of their respective list (stocks on the left and ETFs on the right).  See table below:

Nvidia’s next chapter? 

Intel and Micro Devices have dominated the U.S. chip sector for decades.  When Nvidia first entered the market, it signaled the advent of sophisticated graphics processing units (GPUs) which were better able to render images.  This was new and exciting for gaming consoles.  However, with rapid innovation Nvidia began exploring faster chips which became vital in the development for Artificial Intelligence (AI).

With the advent of Chat GPT in November of 2022 and the commitment by other firms such as Meta, Microsoft, Salesforce and Google, software developers began to realize quickly that the next universe to conquer was going to be machine learning and eventually the development of robotics which could think like human beings.

What the future holds for AI and for Nvidia specifically we cannot imagine. Up to now, very few people have been visionaries enough to see forward this huge AI movement (one person did which we will comment on shortly).

Has the stock price reached a bubble or can it double from here and the company become a $3 trillion or even $4 trillion dollar company?  Can the growth rate continue at the speed to which we have seen over the last year?  Nobody knows the answer to these questions.  However, it did cause me to recall a similar growth story (of the many that came crashing down to Earth in the 1998-2002 period).  Therefore, some modicum of caution is advised.  There may be some catalyst that could cause Nvidia to go into correction mode in the future.  IT IS NEVER A STRAIGHT MOVE UP.   See illustration below.

On the other hand, companies like Nvidia that bring about a new revolution in technology may be in for a long positive trajectory.  I discovered a chart showing another great technology innovator, NETSCAPE, from 1994 that had a similar explosion.  You will notice that there may be many more innings to go in the revolution of AI.  See chart below.

Interesting note on ARK

For several years, Cathie Wood had rock star type status with her flagship ETF ARKK’s stellar performance.  She and her firm had amassed over $100 billion in assets for that ETF among a few others.

Two years ago, she made a wild prediction that we would see annual economic growth potentially accelerating to as much as 50%, thanks to breakthroughs in AI.  Yet, as this frenzy and the price of stocks even remotely involved with AI continues climbing higher, Wood’s flagship ARK Innovation ETF is missing out in epic fashion.  Down nearly 8% so far this year.

I have had many financial advisors I worked with brag to me for several years about how much $ their clients were making because they invested in ARKK.  Unfortunately, Ms. Wood has destroyed more wealth than she may have created.  See chart below:

Let’s look at the rest of the market. (is there any other market besides Nvidia???)

The S&P 500 continued scoring new all-time highs this past week.  Each consecutive positive week in the S&P 500 is setting new precedents. (see chart below).

We have illustrated during the past month in Market Outlook what happens when investors purchase at new highs.  As we will illustrate shortly, several good months in a row can spell above average periods of returns looking out 12 months.

The entire US stock market is still dominated, however, by the top 10% of stocks that make up all US stocks. This includes small, midcap and all large cap stocks listed on the exchanges.    This is where the Magnificent 7 term came from.

Given that those 7 mega-cap stocks last year (2023) were responsible for over 50% of the S&P 500 index return, their influence cannot be underestimated.  See how the top 10% of stocks of the entire US stock market have risen since 1983 and then after a pause during 2008-2009 (GFC), they began rising yet again to a rise not seen since 1929.  See chart below:

This move up has also been met with positive indications from the new highs/new lows chart below.  This is one of many indicators that some of our Algos look at when determining new positions in the stock market.

In recent Market Outlooks we commented that we would like to see the equal weight S&P index (RSP) catch up with the capitalized weighted S&P 500 index (SPY).  Recent new highs reached in the equal weighted index may validate that more stocks are participating in the recent rally.  This is a positive sign.  See chart below:

I especially liked the following chart that I saw yesterday.  I believe the author provides solid advice.

Small and midcap stocks are stuck in neutral so far in 2024. 

While the NASDAQ and Semi celebrations were occurring, small and midcap stocks had a negative week.  We suspect that higher trending interest rates are weighing heavily on these smaller companies, which are more dependent on financing and less flush with cash than many larger companies.

As our chart illustrated above, most investors are piling into the highest capitalized weighted stocks in the market.  We found a good chart, shown below, that indicates that the average money manager and/or Financial Advisor has allocated less money to this area of the market.

Less exposure to these smaller stocks might be the right move if we go into an economic slowdown or full out recession.  Clearly many investors remain cautious of the belief that we may still be headed to this path.

One note about small & midcap stocks.  We have developed a quant based strategy which factors in earnings growth and uses the Market Gauge proprietary weighting system along with profit targets and stops.  This strategy performed well with real assets in 2023 (up 55%) and the previous 5 years back tested.  If you would like more information reach out to [email protected].  This strategy is fairly simple to follow and trade. 

In the meantime, has anyone noticed some of the markets outside the US? 

See charts below:

 

Under the radar, keep a watch on Energy stocks and ETFs.  This sector of the market has been quietly moving up.   This area may be the next sector to catch fire later this year?

The Cost of Food Keeps Increasing

The past few weeks (and months) we have mentioned that inflation is not yet under control.  We could spend many pages here discussing why the formulation of the CPI is a moving target and not necessarily representative of normal folks’ consumption.  The mere fact that one of the biggest weightings in the CPI is shelter (and NOT food and other ongoing living expenses makes us scratch our head.

We came across the below chart showing the price of a Big Mac.  Since COVID many (thousands upon thousands) restaurants have had to close their doors because food costs became too high, labor was and is still tough to obtain (tight labor market) and rents have increased greater than the profit margin of operating the business.  It has been a tough business, no doubt.

However, fast food has become bigger taking the place of casual dining.  And, surprisingly, fast food has seen profit margins improve compared to those at sit-down, non-chain eateries.  A Big Mac may be pricey, but fast -food profit margins keep improving.  See chart below:

We want to end on a positive note.

We are 4 days away from February ending positive on the S&P 500 for yet another month and the 4th in a row.  As the below chart indicates, four positive months in a row have historically led to a positive return 12 months out 100% of the time.  See chart below.

It also appears that to have better than average odds of a good 12 months out, the markets only need 3 months in a row (December, January and February).  See chart below:

Please remember that past performance DOES NOT MEAN that it will work out this way again.  So be careful and use a disciplined approach to your trading and investing activity.

We now turn it over to Keith and his team to provide the BIG VIEW bullets.  If you are interested in receiving more information on the investment strategies that MarketGauge offers, please reach out to [email protected].  He is our resident expert on all of the investment strategies and your ability to easily and without much effort trade our long-term successful investment models.

Thanks for reading.  Have a good week and good luck in your trading and investing activities.

Donn Goodman

 

 

 

Risk-On

  • The market survived a big test with NVDA earnings, propelling SPY & QQQ to new all-time highs. (+)
  • 13 of the 14 sectors closed the week higher with semiconductors and basic materials leading the charge. (+)
  • Slight improvement in internals with the McClellan Oscillator and Advance/Declines remaining above the midline as markets pushed to new highs (+)
  • Risk Gauges remained fully bullish (+)
  • Retail (XRT), Transportation (IYT), and Semiconductors (SMH) all broke out to new highs, while only Regional Banks (KRE) lagged. (+)
  • After slight spikes in recent weeks, volatility receded back towards recent lows (+)

Risk-Off

  • Volume was mixed, lagging the overall bullish sentiment and new highs in the market. (-)
  • Despite the new market highs, rates put in sizable counter-move on Friday, but remain below their 50 and 200-day moving averages. (-)
  • High-Yield debt underperformed treasuries, particularly on Friday, threatening to turn that ratio bearish with a similar signal in Wood vs Gold (-)

Neutral

  • China lead up almost 6% on the week with clean energy and solar being the weakest spots. (=)
  • Growth and value have been swapping leadership positions recently with both ratios sitting squarely on their averages. (=)
  • Copper is sitting right on its 50 and 200-day Moving Averages, which are about to make a golden cross, while elevated inflation levels remains a concern. (=)
  • Recent strength in emerging markets continued, led by China. (=)
  • Gold rebounded from its recent lows back into a bullish phase (=)

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