All Eyes on Nvidida

Stocks took a dip today as the countdown to Nvidia’s earnings and Federal Reserve minutes has investors on their toes. The S&P 500 dropped by about 0.3%. The Dow Jones Industrial Average lost 0.4%. Leading the decline, the Nasdaq Composite fell by 0.5% following yesterday’s drop.

Investors are keenly waiting for Nvidia’s results. Its shares dipped 4% yesterday, marking its worst day since Oct. 17. The anticipation is high for the chipmaker’s fourth-quarter results, considered crucial for AI investments and possibly a turning point for the stock market.

Nvidia shares have absolutely scorched higher over the last few months, which will have traders looking for anything in the chipmaker’s earnings call that could be seen as a disappointment. In other words, it’s going to be very, very difficult for Nvidia to justify its current share price in the event that earnings aren’t a blowout success. Goldman Sachs noted earlier this week that hedge funds have started to trim their positions in Nivida along with other “Magnificent Seven” stocks due to mixed growth prospects.

But among the “Mag Seven,” Nvidia is by far the most important at the moment in that it represents the bull case for a continued AI and tech-driven surge.

Goldman Sachs highlighted the broader market implications of Nvidia’s performance in a recent note to clients, confirming our hypothesis that we’ve been discussing over the past week – historical data, according to Goldman, shows that when Mega Cap Tech stocks face a significant drop, it tends to drag the S&P 500 down with them. The bank’s analysts concur with us, adding that Nvidia’s heavy influence on the momentum factor and its link to AI beneficiaries could amplify movements across the market.

Momentum trading indicators and positions are currently stretched, signaling a high risk of a pullback. Goldman Sachs pointed out the elevated risk in systematic exposure to momentum and the crowded nature of Mega Cap and momentum trades. Specifically, Nvidia’s recent decline from overbought conditions underscores the fragile state of its market positioning.

For Nvidia holders, the company’s recent performance dip is seen as a result of profit-taking ahead of expected earnings volatility. Many investors have turned to options to navigate this uncertainty, although the high volatility of Nvidia’s stock makes these strategies costly.

Goldman Sachs suggests a diversified hedge against potential Nvidia volatility, indicating that recent Nvidia earnings have tended to consolidate rather than break out, despite positive results. The re-engagement of retail investors has disrupted some popular trading strategies, emphasizing the need for careful risk management.

UBS analyst Tim Arcuri remains optimistic about Nvidia, citing improved lead times and potential for significant revenue upside in the latter half of 2024. Despite concerns over high expectations and changing lead times for Nvidia’s products, the focus is on product updates, AI services growth, and adjustments to China-specific product strategies.

At present, options market activity is pointing to an implied post-earnings move of 10% for Nvidia. If the stock drops that much, you can probably kiss the rally goodbye as traders panic, looking for downside protection (likely via the VIX), sparking a major selloff.

In short, tonight’s Nvidia earnings call is going to be a massively important event, not only for Nvidia shareholders, but for the broader market as well.


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