With the U.S. election out of the way and Donald Trump’s administration filling out, the market will turn to Nvidia Corp. (NASDAQ: NVDA) earnings this week to see if animal spirits can keep the party going.
I’m very bullish on artificial intelligence (AI) and the productivity enhancements it can bring. Part of me is terrified by the other things it can unleash in terms of being able to trust what you see and hear on social media, but I will leave that for another day.
I’ve seen many examples of video and stills that look real, but were created by AI and I mostly could not tell the difference. You probably have experienced this too. But for the most part, it’s exciting and beneficial. On the investment side, my company is investing as heavily as it can and likely will help us make better trades and security selection decisions.
It can help with forecasting economic and market conditions. It can help tilt the odds of success a bit more in our direction. The next two hires on my investment team will be AI-enabled coders.
For the industry leader like NVDA, it has huge potential in the coming years to be sure. However, we were at a venture fund – that we invest in – conference last week and they talked about one of the portfolio company’s quantum computing technology offering that’s not too far off that may significantly eat into NVDA’s market share. To be sure, we can’t time it or know when that shift will happen, but it will.
There is always a new technology coming. NVDA has had some challenges with fabrication capacity, quality control, and most recently reports of chips overheating. So idiosyncratic risks are high. NVDA is now 8.7 per cent of the QQQ (NASDAQ 100 ETF). It recently passed Apple and Microsoft to be the largest holding.
Looking at the chart of the QQQ since the pandemic low, we see a clear trend channel that has found resistance at the top of the channel in July, creating an important high. That high was broken on the post election rally and was tested last week on the pullback.
Will it hold? The NASDAQ 100 was down five days in a row last week and that has not happened since 2022. When we add the bearish RSI divergence we can see in the chart (loss of bullish momentum), we get a sense of how important NVDA’s earnings are this week for the markets overall.
Based on at-the-money (ATM) options pricing for the Nov. 22 expiry this week, at the time of writing this note (9:35am using NVDA 139/140, Nov. 18), the options market makers are expecting about a US$11 move up or down on earnings. This is best estimated by taking 85 per cent of the ATM long straddle (buying a put and call at same price).
Last week’s reversal on the QQQ with all the noise around Tesla and that a Trump administration may go hunting for the big cap tech behemoths where the founders may have been supporting the Democrats clouds this analysis. What is clear is the large cap behemoths are expensive and have shown correction risk at these levels before.
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