As Treasury Yields Signal Danger Ahead, Keep 3 Tips in Mind
With AI stocks continuing to rise, investors must keep complacency in check.
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Is the market in an AI/tech bubble?
Shares of chipmaker Nvidia (NVDA) have gained 10% in the past week. Competitor Advanced Micro Devices (AMD) has climbed 81% over the past month. Fiber optic networker Corning (GLW) has gained 118% this year.
All of the above names are in the AI infrastructure sector. If there is a bubble, it’s contained within that sector.
The worst thing an investor can do is exit a bubble too late. There is no worse scenario than going down with the ship.
The second-worst thing an investor can do in a bubble? Exit too soon.
The Balancing Act
In 1998, many were calling the tech-driven dot-com rally a bubble. After all, the Nasdaq Composite gained nearly 40% in 1998, the fourth consecutive year of double digit percentage growth.
However, investors who sold in 1998 missed the best part of the bubble. In 1999, the bears capitulated, and the Nasdaq Composite gained over 85%.
How do we maintain the proper mindset while performing this balancing act?
Enjoy the Ride, Avoid Complacency
In every bull market, complacency creeps in. Complacency will keep you in the market when it's time to get out.
Here are three thoughts to help investors ward off complacency:
1) The market is like an ocean. Right now, it seems like smooth sailing.
Even so, we respect the ocean. We wear our lifejackets and know where the lifeboats are located.
In the markets, this translates to practicing solid risk management. Size positions properly, and plan exits in advance. Trim positions when appropriate.
2) Sailors don’t conquer the sea, they navigate it. The markets are no different.
Believing you’ve mastered the ocean is the first step toward winding up at the bottom of it. Believing you’ve mastered the market demonstrates a lack of humility, and invites disaster.
3) Finally, stay humble.
There are humble traders, and there are traders who are about to be humbled.
Strive to be the former, not the latter.
Danger Ahead?
One issue that deserves more attention is the technical breakout in U.S. Treasury yields. Higher yields could eventually threaten the rally by attracting capital away from the stock market and into bonds.
Tuesday’s consumer price index (CPI) for April showed inflation rising faster than expected. Consumer prices are now climbing at a 3.8% annual rate, higher than the expected 3.7% and much higher than the Fed’s stated goal of 2%.
It's Back...
It’s dawning on the bond market that inflation, exacerbated by the U.S.-Iran war, might not be transitory. As a result, long-term Treasury yields are once again on the rise.
The yield on the 30-year Treasury bond climbed above 5% on Tuesday. The breakout from a cup-and-handle pattern (shaded yellow) could carry the long bond’s yield as high as 5.4%.
The yield on the 10-year Treasury note continues to creep toward 4.5%. A rounded bottom pattern (shaded yellow) indicates a potential rise to 4.65%.
Bottom Line
Whether or not we’re currently in an AI bubble will be determined in hindsight. If markets change direction, charts and technicals will provide sell signals and exit strategies. In the meantime, investors can focus on maintaining the proper mindset.
Related: What Investors Can Expect From Trump's Trip to China
At the time of publication, Ponsi was long NVDA, AMD and GLW.
