No Follow-Through, and Nvidia Gets Cheaper

A late bounce undid some of the market damage on Tuesday. Breadth improved to about 36% positive from its worst levels, and bonds bounced off their lows. The Invesco QQQ Trust (QQQ) and the iShares Russell 2000 ETF (IWM) both finished down about 0.6%.

Interest rates and Nvidia (NVDA) were the catalysts. The consumer price index came in hot, and Fed Governor Christopher Waller said a half-point rate hike in December should be considered if core inflation keeps running at its current pace. Buyers shrugged that off on Tuesday morning, but it weighed on the market as the day went on. Then Nvidia dropped another 6%.

The bigger issue is what I discussed on Monday. That rally was largely driven by poor positioning. Investors who were caught out of position scrambled back in, and short sellers covered. That kind of buying doesn’t make for good follow-through, because once the scramble is over, the buyers are gone. That’s what we saw on Tuesday.

This is typical volatility in a struggling market. Big up days are followed by big down days, breadth swings from one extreme to the other, and nothing holds long enough for charts to develop. Investor’s Business Daily is still waiting for a follow-through day, and the earliest one can come is Wednesday. With rates and Nvidia both pressuring sentiment, I wouldn’t count on it unless there is some surprisingly positive news flow.

Is Nvidia Selling Overdone?

Nvidia has fallen from about $240 to $167 in a little more than a month, a 30% decline in the stock that has been the face of the AI boom. It hurt sentiment again on Tuesday, but you have to wonder whether the selling is overdone.

Analysts expect Nvidia to earn $9.29 a share this fiscal year and $15.81 next fiscal year, a 70% increase. At $167, the stock trades at about 18 times this year’s earnings, roughly the same multiple as the S&P 500, and less than 11 times next year’s. The market is pricing Nvidia as if it were an average company with no growth ahead.

There are reasons for doubt. Hyperscaler spending is Nvidia’s revenue, and investors are rewarding the hyperscalers for spending less. The smaller AI cloud companies that have been big buyers of Nvidia’s chips are running into a capital crunch. The incoming governors in Texas, Ohio and Georgia have pledged to restrict data centers. Then there is the board’s investigation of chief executive Jensen Huang. The Financial Times reported that Nvidia hired a former U.S. prosecutor at the law firm Wachtell, Lipton to lead it. That is what a board should do, but it also tells you the investigation won’t be resolved quickly. It will likely hang over the stock through the November 17 earnings report and into the new year, when Congress could call Huang to testify.

The business itself is still strong. The chip roadmap, the CUDA software that keeps customers locked in and the manufacturing partnerships don’t depend on any one person. Amazon (AMZN) and Alphabet (GOOGL) still say AI demand exceeds their capacity. Even if next year’s earnings came in a third below the estimate, Nvidia would trade at about 16 times. At this valuation, the stock is pricing in something close to a collapse, and unless the business falls apart, that looks overdone.

That doesn’t mean it’s time to buy. Cheap stocks can get cheaper while the uncertainty lasts, and the leadership question won’t go away soon. The November 17 report is the next test. If the numbers hold up and the stock rallies, the market was too pessimistic. If it can’t hold a good report, the estimates are going lower.

Game Plan

I raised my cash levels on Tuesday. I cleaned out some lagging positions and locked in some gains. I’m not seeing enough positive chart development right now, and I want plenty of ammunition on hand when conditions improve.

I’m confident that we will have at least one good run into the end of the year, and I plan to be aggressive as it develops. As I’ve written many times, I’m not concerned about catching turning points. I’m focused on catching momentum as it develops. That means letting the market prove itself first, with charts that set up and leadership that holds for more than a day. When that happens, I’ll have the cash to put to work quickly.

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre was long AMZN.