Over the last couple of weeks, it looked like the S&P was entering into a topping pattern with increased volatility. However, yesterday’s action where the S&P rose over 2%, put that thesis into question. The large gains yesterday were all due to the excitement created by the earnings of Nvidia. The index continues to be overbought and overstretched so a correction of some significance is becoming more and more likely. However, as stated here often, the market can be become overbought to a greater degree than most people expect. Other than being stretched, there is nothing not to like in the S&P chart. That said, at these levels, investors should be cautious and wait for the expected correction before putting more money to work.
As noted above, earnings by Nvidia after the market close on Wednesday led to an avalanche of buying yesterday. Nvidia itself was up an astounding 16% for the day. Yesterday’s rally has the stock up nearly 60% in the first 53 days of 2024. This is in addition to the 240% it was up in 2023!! The gain yesterday increased the stock’s market cap by $264 billion. To put that into perspective, the one day increase in market cap is bigger than all but 28 companies in the S&P 500. Nvidia is priced for perfection, and nobody is perfect. When the tide turns, it could get ugly.
Our Point
It continues to be all about AI. Yesterday’s rally saw most all of the large tech stocks rally significantly on the anticipation that Nvidia’s blowout earnings and rosy forecast will continue to spill over to the rest of the tech sector. However, breadth continues to struggle as the equal weight S&P (RSP) remains a laggard when compared to the market cap weighted S&P. For the year, the market weighted S&P is up 3 times as much as its equal weighted cousin illustrating the effect that Nvidia and the rest of the magnificent 7 stocks are having on market returns. With so much riding on so few stocks, the potential for a sharp decline increases daily. We are in no way turning bearish, but we do believe that the market is overdue for a correction. The bull market is intact but overstretched and a decline of 5-10% would be healthy for the market at these levels and would do nothing to the overall bull market trend that started last October. We would be enthusiastic buyers on a significant correction. Earnings season is wrapping up so the market will be looking for other stimuli to react to. Fed minutes were released earlier this week and revealed no surprises. We’ll get a number of Fed members giving speeches over the next few weeks that could provide some reason for the market to continue up or pullback. With potential rate cuts being expected sooner rather than later, any disruption to that narrative could provide the fuel for a decline. Next Thursday the government will release the PCE (Personal Consumption Expenditures Index) for January. With the PCE being the Fed’s favored indicator of inflation, a confirmation of the increase in inflation reported by the CPI and PPI earlier this month, could damper market expectations of both the timing and degree of future interest rate cuts. With yesterday’s large gains, we decided to book some profits and pared our equity exposure. Nobody ever lost money taking a profit. We sold a little bit of all of our equity positions but kept our bond holdings intact. The move frees up cash to redeploy on any correction and gets us a little more defensive. It is rare to sell at the top and we could continue up a little bit more, but we believe we are closer to a short-term top than not. We will reassess should the market take another leg up. As we near the end of February, March madness is right around the corner. It is my favorite time of the year. With Spring springing and college basketball heating up, it always brings a smile to my face. With the Vols in the thick of things, the smile is a little broader this year. Have a great weekend and enjoy the first vestiges of warmer weather.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bills Asset Management (“BAM”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from BAM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BAM is neither a law firm, nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of BAM’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.billsasset.com.
Please Note: If you are a BAM client, please remember to contact BAM, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. BAM shall continue to rely on the accuracy of information that you have provided.
Please Note: IF you are a BAM client, Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
About Bo Bills
Founder and Chief Investment Officer at Bills Asset Management. With over 30 years of experience in managed risk investing, Bo has helped countless clients achieve their financial goals while preserving capital.
Stay Informed
Subscribe to our newsletter for the latest market commentary and insights.