Nail This Tactical Pair Trade: Apple Is Slashed, Nvidia Over Bought
An ideal pair trade may be setting up on an index re-weighting later this week. Here's how traders can capitalize.
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On June 21, 2024, Nvidia NVDA will be added to the XLK, a tech ETF with over $70 billion in assets, when its weighting vastly increases as Apple’s AAPL gets slashed. The reweighting, triggered when NVDA surpassed AAPL in a float-adjusted market cap, will create over $10 billion in buying in NVDA and a similar amount of AAPL for sale.
This non-fundamental buying can lead to a tactical shorting opportunity in NVDA. The shares are on a five-week run that has added over $1 trillion in market cap since earnings — from $2.35 trillion to $3.4 trillion — where the market fully appreciates its dominance in AI. The stock is well over-bought — at an RSI level over 81.5 when the stock quickly pulled back from $974 to $855 and over two standard deviations above its 50 DMA. However, shares are likely to add to that froth as buyers continue to front-run index buying, so patience until at or near Friday’s close is likely more opportune.
After index buying is completed and momentum stalls, an initial 5% to 10% pullback should be in the offing to retrace and consolidate some of the epic run it has made in recent weeks. The case that NVDA is cheap is far back in the rear-view mirror. The case for a heady price-to-earnings target of close to 40 needs to be made, extrapolating strong earnings trends on 2026 numbers. After such an enormous momentum move higher, investors will likely take out a sharper pencil on the way down to look for better entry levels.
Much like the Nasdaq bubble culminating in 2000, where euphoric assumptions of internet growth led to the over-buildout of bandwidth and fiber, the deployment of computing power may become excessive at some point. Aside from the bottlenecks that may occur from the voracious power consumption. In the current race to construct data centers with tight chip supply, the market is relying on any over-ordering of chips or over-building well off into the future. Nonetheless, as the newly crowned most valuable stock on earth, surpassing Microsoft MSFT and Apple, the sustainability of Nvidia’s demand can crop up as the market discounts unimpeded growth for the next several years.
Potentially helping the tactical short trade, the Nasdaq composite QQQ and the semiconductor index SMH are also significantly over-bought, with RSIs in rarefied air over 80. This is not to suggest a major top is forming, but a short-term crescendo of the bull move may be underway.
On the other side of the trade, AAPL will see significant index selling on Friday, potentially creating a reasonable entry. Since Apple’s Worldwide Developer Conference last week, earnings estimates for 2025 and 2026 have climbed materially. On Tuesday, JPMorgan upped its target to $245 and raised 2025 and 2026 estimates to $8.10 and $9.69 relative to consensus of $7.26 and $7.64. Dips will get bought as Wall Street catches up on estimates for the unexpectedly bullish AI iPhone cycle. This index-selling dip should be no exception.
When a stock lurches higher or lower by 5% to 15% for non-fundamental reasons like an index rebalancing, taking the other side of the trade often leads to an excellent tactical trading opportunity — even if that means shorting NVDA — anticipating a retracing of some or all of the gains or losses. The setup to short Nvidia into strength into Friday’s close and pairing with buying AAPL on weakness can make for an ideal
At the time of publication, Ginesin was long AAPL and short AAPL calls.
