Divergence Narrowing

• The S&P 500 closed 0.2% lower on Thursday after briefly peaking at a new high of 5,500.

• Similarly, the Nasdaq retreated by 0.8% from earlier record levels, reflecting a pullback in the performance of tech megacaps.

• Chip giant Nvidia, pared earlier gains and sank by 3.5% to close below Microsoft giving up its position as the world’s largest company by market cap.

• Meanwhile, Microsoft and Apple lost 0.1% and 2.1%, respectively.

• Investors took advantage of the sector’s strong momentum and cashed their gains as economic data shows growing evidence that the US economy is slowly losing its resilience to higher interest rates by the Fed.

In my last note we talked about the valuation on Nvidia - from the "Nvidia moment" in May of last year, the stock was up 3.6-fold at yesterday's high.

That said, as we've discussed, along the way the share price had actually gotten cheaper relative to its earnings power (i.e. the earnings growth has outpaced the even torrid share price growth). That dynamic has recently changed, Nvidia is no longer getting cheaper - the quarterly earnings growth is slowing, while the share price growth has accelerated (amplified by the anticipation of and realisation of the stock split).

Yesterday we got what looks like the crescendo (for the moment). The stock put in a technical reversal signal (an outside day) - and unsurprisingly, with its disproportionate weighting in the major indices, the reversal in Nvidia contributed to similar signals in the S&P 500 and Nasdaq futures. Here's a look at the Nvidia chart ...

For market technicians, this is a perfect “outside day” reversal signal. This is when a new high is set in an uptrend, a buying climax, and the buying exhausts and weak speculative longs are quickly shaken out of positions forcing prices to lower lows than the prior day (closing near the lows). A wide range (check) and significant volume (check) increase the likelihood that a trend reversal is underway.

So, is this a negative signal for the broad market? Or does this signal a rotation, and broadening of market performance?

It looks like the latter. As you can see in this chart above, we've had a divergence between the performance of the S&P (led by the big AI tech) and the Dow since mid-May.  Same is said for the S&P and Russell 2000.

That divergence narrowed.

For some perspective on the significance of Nvidia's stock performance over the past year, and the "Nvidia moment," I want to copy in my 26 May 2023 note ( here ). This is the day after Nvidia's game-changing Q1 earnings report last year.

Just as the world is pondering recession, if not depression (and deflationary bust), this earnings call (the "Nvidia moment") might be the defining moment for the rest of us - the moment that resets the perspective on the next decade, for perhaps a boom period. 

The interest rate markets seem to be reorienting toward this. The 10-year government bond yield has risen from 3.27% to 3.60% in just two weeks.

Of course, the narrative surrounding that has been "debt default." But at the peak of the debt default frenzy;

• Gold was on record highs - it's now 6% lower, and falling.

• The dollar is rising.

• The Nasdaq just made another new high for the year.

• And the interest rate market has swung, over the course of one month, from pricing in an absolute certainty of rate cuts by year end, to about a coin flips chance - and, moreover, now pricing in the chance of another rate hike.

Remember, AI will drive productivity growth. Productivity growth drives economic growth. And it's early . . .

---

From Gryning’s homeland - Sweden - to you all, Glad Midsommar.

Think of today as our National Day / Independence Day, there’ll be a little bit of dancing, some fermented fish and plenty of schnapps!