Do Parabolic Moves Signal an Overheating Market?
Let's examine the action in Super Micro Computer, Arm Holdings and Nvidia to see whether or not the party may be nearing an end.
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For the first time in years, the word parabolic has been popping up in market discussions. According to Merriam-Webster, a parabola is "the intersection of a right circular cone with a plane parallel to an element of the cone."
Confused? You're not alone. Though it may not be 100% technically accurate, suffice to say that a stock that is rising on a steepening curve fits the market's definition of a parabolic move.
Right now, the poster child for a parabolic move is Super Micro Computer SCMI , which on Thursday closed above $1,000 per share for the first time. Since the start of this year, the San Jose-based server and storage vendor has gained an astonishing 359%. (As an aside, Real Money Pro's Bob Byrne on December 26 selected Super Micro Computer as his top stock pick for 2024, so kudos to him!)
SMCI's steepening curve represents pure momentum, almost a state of panic-buying. This type of wanton buying -- often referred to as froth -- sometimes marks market tops.
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Super Micro Computer represents an ideal example of what the market considers a parabolic move. What about Nvidia?
Nvidia NVDA has gained nearly 50% since the start of the year. While that's an impressive figure, note that the stock's chart doesn't display SMCI's steepening curve.
Nvidia is a very strong stock, but it isn't in parabolic mode. Nvidia is a $1.81 trillion company, so its gains must be considered impressive due to its size.
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The price action in Arm Holdings ARM lacks SMCI's graceful curve, instead opting for a straight-up rocket launch. To be fair, Arm Holdings only began its ascent last week, so the stock may yet form a parabolic curve.
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As I mentioned earlier, this type of price action often marks market tops. However, that doesn't mean the party is over. In fact, we might be entering the most exciting phase of this bull market. To understand why, check out this article from last week.
Until now, the rise in stock prices has been consistent and orderly. The stocks mentioned above are outliers, and are not indicative of the market as a whole.
5400 is still my target for the S&P 500. If traders erupt into a buying frenzy, it could go higher.
Stocks are getting frothy, but we're not at a level of exuberance that would mark a top. The major indexes still have upside as long as the current mode continues.
At the time of publication, Ponsi had no positions in any securities mentioned.
