Nvidia, Magnificent 7 Return as Safety Plays

One of the most common patterns of action this year has been a strong small-cap rally that lasts a couple of days and then a sharp drop when money flows back into the Magnificent Seven MAGS stocks. The Magnificent Seven names cover up broader weakness, but they make the indexes and the Nasdaq 100 QQQ look good.

That is what we have seen so far on Monday. There is likely a little Thanksgiving hangover as well, but the Magnificent Seven names are up over 1.5% and covering up the negative breadth and a drop in the Russell 2000 of 0.5%.

One of the reasons I’ve had a positive view of Nvidia NVDA, despite poor technical action, is that the theme of "returning to the safety of mega-cap technology" has been consistent for so long. While the bears growl about how the valuations aren’t justified, investors see them as safe, primarily because they have had good relative strength for so long. It is highly likely that Nvidia has a number of good quarters coming up, and that is more important than valuation if you want to put cash in something safe.

Some of the recent small-cap winners are getting hit on no real news. They are simply extended, and money is rotating back into the Magnificent Seven. This isn’t likely a market top, but it is the sort of volatility that is likely to occur several times in the weeks ahead.

It is important to remember that there are some tremendous gains in the Magnificent Seven, so that may prevent selling that triggers taxable gains. In addition, there will be funds that want to show these stocks in their portfolios to finish this year. That will keep a bid under the group and will cause periodic rotation when investors feel nervous.

I’m managing positions today and not doing anything major right now. Most charts need some time to find support and set up again.

At the time of publication, DePorre was long NVDA.