The market's finally flattening out.
The S&P 500 stumbled into the red on Friday, posting its first losing week since Jan. 2. No, large-caps aren't falling off a cliff (the weekly loss for the S&P clocks in at a little less than half a percent). But we're starting to see some cracks in the foundation following the melt-up move that began in early November.
Last week, we reviewed how to react when the market enters a pullback phase. Certain stocks and sectors (I'm looking at you, semiconductors) have become frothier than an $8 latte. As we've said for what feels like ages now, we could see a 5-10% market drop trigger if these overextended stocks settle down and reverse.
It's a fact - pullbacks like these can happen several times a year. Just don't tell the throngs of speculators who will no doubt panic at the first sign of an actual market drawdown. It's only been three months since everyone was convinced stocks were headed for a crash. But the melt-up rally has wiped the herd's hard drive clean. As far as many speculators are concerned, everything is back to normal. Stocks only go up...
If you've been around the block a few times, you're probably more than a little worried over the market action we've seen so far this year. After all, the signs of bubbly action are all around us: parabolic rallies, historic squeezes, and insane earnings reactions are starting to pile up. It feels like 2020 all over again.
In order to get a feel for just how deluded the speculator class has become, I grabbed my hazmat suit to skim the Wall Street Bets Reddit community and a few other stock trading message boards. As you can probably guess, the YOLO speculators are back to their old tricks. But instead of GameStop and AMC shares, they're slinging options on semiconductor stocks and other tech names.
The action this week centers around NVIDIA Inc. (NVDA) earnings, which are set to hit the wire Wednesday after the closing bell. Most of the comments I saw were written by posters who've already loaded up on NVDA calls - sometimes light years out-of-the-money. But to my surprise, there were also a few bears mixing it up with the long and strong crowd.
No one has any way of knowing how the Street will react to NVDA's earnings. But I'm willing to bet that we'll see some volatility after the numbers come out Wednesday night. After all, we're dealing with a major market leader that's up almost 50% year-to-date. And while shares did slow their ascent last week, the stock still has yet to post a fat red candle since its breakout above $500.
A couple of important points to consider when analyzing this chart:
First, we need to acknowledge that the bulls have been dead right about NVDA (and other big tech/semiconductor plays). The early 2023 rally off the lows and subsequent breakout at $500 in January have added up to an astounding 380% rise. That said, I don't think betting against this stock outright is a solid trading plan. We have to respect the trend - it's one of the strongest on the market!
At the same time, NVDA shares are technically overbought. At the very least, we should expect some retracement or longer consolidation period following the extension off the $500 breakout level. Again, this isn't a call for an all-out crash. But a sharp move lower - even a temporary one - would help relieve some of the pressure.
That said, the Wednesday NVDA earnings release could be the market-moving event of the week, if not the entire month. Other high-flying semiconductor stocks have already started to lose steam, with the VanEck Semiconductor ETF (SMH) finishing lower the previous two sessions. If the flagship stock is unable to impress, we have to assume the other names in the group will also come under pressure.
Everyone's been talking about the popular "Mag 7" mega-caps dominating the tape so far this year.
Yet as we enter a period of seasonal weakness, the bears are beginning to pick off these unstoppable stocks one by one.
Tesla Inc. (TSLA) was the first to fall from grace, breaking from the group after reporting disappointing earnings in January - which led to an ugly drop of 25% to kick off the first quarter.
TSLA isn' the only one of the big boys having trouble keeping up these days. Apple Inc. (AAPL) has been a choppy mess for the past six months. It's down nearly 3% year-to-date and remains well off its highs - even as semis and other tech names dominate the tape. Its Feb. 1 earnings announcement failed to generate any excitement - and the October lows could easily come back into play should the stock continue to slip this week.
Alphabet Inc. (GOOG) also failed to rally the bulls with its earnings report in late January. The stock remains nearly 8% below its highs and is threatening to go red for the year following a failed post-earnings rally attempt.
Pay close attention to these and other Mag 7 names as NVDA earning approaches. They could offer an excellent opportunity to bet on some short-term downside action that might catch the herd off guard.
The Daily Reckoning