Sky is the limit – Big Tech and negative News run the show
US stock market with record highs remains in focus
Artificial Intelligence (AI) and speculation as a main driver
Together with speculations on rate cuts made by central banks
Copy – Paste Story from February 28th?
Not really, some major divergence
US Markets are overbought
High potential of a pullback
Almost no day without news about new record highs on stock markets. Especially in the US and on the Tech sector, the Artificial Intelligence (AI) topic drives its players to new record highs. This week, the S&P500 Index reached already its 30th record close of the year out of 116 trading days.
Next to the AI party, markets benefit from economic reports which rather negatively surprise. Does this make sense, as this could be interpreted as a negative sign for the economic cycle? This has to be answered with yes, as with a healthy economic slowdown, the likelihood of a rate cut rather sooner than later by the US central bank Fed increases. Investors bet on this scenario as each rate cut should be positive for equities.
I could do almost a copy-paste story from my article published on February 28th here on my ETFMandate blog, including my view on the markets.
However, something is different, the overall market sentiment is not in the euphoria or extreme greed level, as back in that time.
The index can be used as a contrarian indicator: Sell on extreme greed levels, buy on extreme fear levels.
In April, the index turned a bit too early for me, with level going only to fear and not extreme fear level. One of the reasons, why I was deciding not to re-enter in a big stake to the tech market, missing out part of the latest tech rally.
CNN Fear & Greed Index
1 Year as of 18 June 2024
Source: CNN.com 18.06.2024
However, during last days and weeks, I already highlighted on my social media channel, via stories on Instagram (@etfmandate), that AI related stocks and especially Nvidia stock price is clearly speculative driven. Interesting to follow how long this rally will last before a take profit correction could hit badly these stocks.
Tesla comes to my mind. The stock price of the electric car producer was speculative driven for a very long time period. Tesla’s market cap reached tremendous highs, giving the company a value exceeding the total values of all the big car producers together. Once this bubble in this single stock came to an end during the 2021, the stock price was hit badly and a longer downtrend started.
As already mentioned in my articles before, such speculative cycles are not easy to read and can last quite a while. However, I decided to go short on some AI stocks and on Nvidia itself during recent days. In the meanwhile, the stock is on its way to new record highs and to become US most valuable company and overtaking even Microsoft.
My position has definitely a speculative nature, can be closed any time and should be only implemented by experienced investors who are aware of the risks such a short position comes with. It seems I am not the only one, as I could read that there are USD 34bn short bets on Nvidia placed in the market.
There are several reasons making this investment decision. With the current AI trend, the demand for AI chips will stay high. However, I rather do not believe that the company can hold its growth path, as competitors do not sleep and bring new AI chips on the market. Competition will come along with price pressure which will lead to a decreasing growth trend in revenues and earnings.
Looking at Nvidia’s valuation, I did lately compare the company with Apple, after Nvidia briefly even overtook Apple’s market cap of USD 3 Trillion.
Apple (lhs) vs. Nvidia (rhs)
as of 6 June 2024 (in USD)
Source: IBKR, CNBC.com - 06.06.2024
The gap is massive. Apple sales are almost 4 times higher while profit is more than double compared to Nvidia’s. Investors price the companies on the same level though. Which is currently only reflected by the growth in revenues.
Apple joins the AI club
Just some days later, Apple announced its AI strategy on Monday a week ago. The very first reaction on the announcement was rather negative. However, on Tuesday, the stock price started to take off with speculative buys, as the company joined the club of potential AI stories.
My thought, is Apple seriously going to sell that massively more iPhones due to the new AI features on their latest phones? Only this interpretation could explain such a up move in the stock price.
For me, Apple is just another example, showing that the AI topic is currently in a phase of a hype and speculators drive the stock prices of these related stocks.
Bad news pushing markets higher
On the other hand, the US Economic Surprise Index turned negative. The US data are disappointing the most since 2019. Means, lately economic indicators fell short on market expectations.
Investors have a positive interpretation on this data, as this might lead to softer inflation and to rat cuts by the central bank. Expecting that the US is not going to a recession this environment could be definitely sound for equities, leading to new record highs.
Economic Surprise Index – US vs. Europe
as of 5 June 2024
Source: Bloomberg
The central banks remain in the driving seat. The European central bank did lower its rates, however without a big impact. There was no guidance of potential further rate cuts so far.
The likelihood of a later rate cut and lower number in rate cuts in the US and also in Europe is quite high as sticky inflation does not meet the central bank target around 2%. This may lead to investors being disappointed and reducing their bets and risks within their portfolio.
Momentum Driven Markets – Is Sky really the limit?
Currently, markets are very much momentum driven. Investors buy the stocks which are already in a big upward move, selling the ones in a downward trend. This can be seen on the latest market moves during the last days, driven only by the big players and not the broad number of stocks anymore. It seems like the sky is the limit for these stocks. A clear warning signal to me.
Overall, in my view, markets took already a lot of positive views and interpretation ahead. Today, US markets are technically clearly on an overbought level. In addition, the average cash level of fund managers reached a very low level. A level, which is usually an indicator for a potential pullback.
In my view, in the US, too much of optimism is priced in these days. Room for big upside is rather limited. And the latest hype around AI makes equity markets rather vulnerable and a set-back can take place any time with any news which will be negatively interpreted.
I do not specifically expect a recession to be around the corner which would lead to markets turmoil. Therefore, the economic data and the US job market is in too strong condition.
However, should the momentum turn in the opposite direction, the nice performance is gone maybe even faster than the number of days was needed to get it. Therefore, nothing wrong to be well prepared for a setback, and maybe also to take some chips of the table by realizing by some profit, made in very short period of time.
Nevertheless, the US markets needs at least a healthy consolidation, before I regain confidence to invest in a bigger stake to the Tech Market. It could be, that the Sentiment Index shown above, needs to reach a level of greed or even extreme greed, before such a scenario takes place.
Disclosure of shares in my portfolio specifically mentioned in this article (as of 18 June 2024):
Nvidia: short position
Apple: no holdings