How to Play Nvidia Earnings
I’m raising cash and becoming more defensive while waiting for a catalyst to trigger a shift in market character.
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The market started the day with broad pressure, but a better-than-expected Consumer Confidence report brought in buyers. Strong consumer confidence is a sign that the economy is holding up and it makes it slighly less likely that the Fed will cut rates by a half-point in September 2024.
The market is currently anticipating that the Fed is going to time rates cuts perfectly and avoid any significant economic slowing while keeping inflation contained. The Fed has seldom had perfect timing, but the market believes it is possible right now and that is what is driving the indices to new highs. Strong consumer confidence is slightly inflationary but it is also a positive for growth so it is is bringing in some buyers for now.
Despite the rebound this morning, I am extremely cautious right now. I don’t believe that even a fantastic report from Nvidia NVDA is going to be sufficient to deliver a new uptrend for the Magnificent Seven.
I’m holding a small position in Nvidia that I will hold into the report on Wednesday afternoon, but my game plan is to sell into significant strength and to buy into significant weakness. I believe that big moves in either direction will reverse fairly fast. Nvidia will be fine in the longer term but it is unlikely to continue to have such an elevated level of relative strength. It is the best way to play AI while it is still in the infrastructure phase but competition is building and the AI industry will start to shift away from the huge spending at some point.
As I’ve mentioned, I’ve been building up my cash position and I’m playing stronger defense. I feel like the market is close to a more significant pullback but we have to wait for a catalyst to trigger it. It might be the Nvidia report or maybe it won’t come until the Fed rate cut but further upside is going to be very choppy.
The hardest thing to do right now is to not rush to buy shallow dips. I have a long shopping list but I need more significant downside before I’m going to put cash to work.
At the time of publication, DePorre was long NVDA.
