My Market Roadmap as Nvidia, Walmart Add Pressure
My goal is to develop a framework of possible outcomes and then create a strategy and tactics to profit from whatever happens.
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The market is under minor pressure on Thursday morning following key earnings reports from Nvidia (NVDA) and Walmart (WMT). Nvidia is seeing some routine sell-the-news pressure while Walmart is more worrisome, with comments about how high oil prices are putting pressure on margins and will be passed through to consumers.
Breadth is running about 40% positive and new 12-month lows are just slightly ahead of new highs. The Magnificent Seven is down about 1% while small caps are seeing some minor gains after lagging on Wednesday.
I closed out my Nvidia long position simply because I don’t expect it to do much in the near term. The earnings and valuation are still favorable but I’m doubtful that there is going to be enough investor demand to produce sustained upside.
Planning Beats Predicting
I believe we are at a major market juncture and I am planning strategy and tactics for dealing with whatever might unfold. I want to preface my comments by saying that I actively avoid making predictions. I have no idea how the future may unfold and the market beast will always do its best to humble those who think they know.
My goal isn’t to set price targets or predict technical levels. My goal is to develop a framework of possible outcomes and then create a strategy and tactics to profit from whatever happens. The great likelihood is that I will have to pivot several times and will need to be reactive to events. I plan on being wrong and having to adjust quickly to what happens.
President Eisenhower put it this way: “In preparing for battle I have always found that plans are useless, but planning is indispensable.” It is the process of contemplating the many things that can happen which will help you far more than trying to accurately predict outcomes.
Two Forces Driving the Shift
With that in mind, I believe that we are at a major market juncture for two primary reasons. The first is that the interest rate environment is shifting. We have gone from hoping for interest rate cuts to the great likelihood that we will see rate hikes as inflation ticks higher due in large part to rising energy prices. There is an old saying, “don’t fight the Fed,” which is simplistic but also true. Rising interest rates create pressure on multiples and are a major negative for companies that need financing. The rate environment can change quickly but we are seeing a clear message from bonds that we are heading in the wrong direction and it is likely to persist for a while.
The second issue of concern is the shifting AI environment. As I discussed in my morning column on Thursday, we have three massive AI IPOs on the docket. An event like that is often seen as a classic turning point in retrospect. Historically, large IPOs in the most important market theme since the internet are not an early-stage event. AI is a maturing industry now and that means there will be a shift to some new leaders.
Where the Money Will Be Made
So, what will happen to the market in a rising interest rate environment that is also seeing a massive shift in leadership? That is the $1 trillion question.
If I could answer that question with a high degree of precision, I’d be on my yacht in the Mediterranean, but the best I can do is be ready for a number of scenarios. The most obvious event that will occur is rotational action. The entire market isn’t going to crash and burn or run straight to the heavens. There will be some big winners and losers as events unfold, and the investors who find the right themes at the right times will profit the most.
My best advice is to not get hung up on the indices. Timing index direction is not going to help you make big money. Fooling around with index trades is largely a waste of time. Watch the indices but stay focused on the underlying action.
One of the most likely consequences of the major themes that I’m considering is rotation out of the Magnificent Seven names and into a new group of AI leaders. The big hyperscalers and chip names will likely continue to do well, but the aggressive money will be chasing a new crop of AI innovators. That is where the money will be made.
For example, the quantum group is red hot on Thursday on news that the Trump administration is awarding $2 billion in grants to the sector in exchange for equity stakes, with IBM (IBM) taking half of the package. The pure-play names like IonQ (IONQ) and Rigetti Computing (RGTI) are the early beneficiaries, and they may be a preview of coming attractions.
A more difficult question is whether there will be rotation into the many areas of the market that have underperformed AI in the past couple of years. I have a personal bias toward biotechnology and I see that as a group that could see some flow especially if the FDA finally gets its act together.
Strategy
My strategy in a nutshell is to be ready for a shift in leadership. The only Magnificent Seven name I’m still holding is Alphabet (GOOGL). I’ve raised cash levels substantially and I’ve been focused on tracking smaller names that had strong first quarter earnings reports. I’m concerned about some negative seasonality now that earnings season is over and higher interest rates are providing a convenient excuse for more selling.
My roadmap has many alternative routes along the way but the important thing is that you be mentally prepared for a journey that may require some course corrections as it unfolds.
At the time of publication, DePorre was long GOOGL.
