To The Moon

The S&P 500 index finished the week down 0.3% after dropping 0.7% on Friday, but still notched its 16th record of 2024 the day before. The Dow Jones Industrial Average and Nasdaq Composite fell 0.9% and 1.2%, respectively, but weren't far off their own highs.

⚠️ Trading tips: Expect NVDA to chop next Monday as market is pending CPI report on Tuesday at 8:30am. Any unfavourable news will plunge the chip maker further south for a discounted buy. Do you have the guts to enter knowing a pending stock split news will propel it to the 1k mark effortlessly? 😉

The cheap chip sale is coming

The S&P 500 and Nasdaq closed lower on Friday after touching record highs during the session, with high-flying chip stocks going into reverse and a mixed labor market report that showed more new jobs than expected with a rising unemployment rate.

By looking at the indexes, but there's a reshuffling happening beneath the surface. Since 2018, the S&P 500 has started every year with the same four companies at the top of its market-cap leader board: Alphabet, Apple, Amazon.com, and Microsoft.

While those companies were known for innovation a decade ago, their success over the past few years has been marked by market-share consolidation, layoff-driven margin expansion, and scale advantages in areas like cloud computing. Monopoly power is great for stocks, but companies wielding it can lose power when new categories emerge.

Those new categories are here. Nvidia wowed investors last month when its sales results for chips powering AI applications impressed even the most bullish analysts. The stock started the year in fifth place in the S&P 500 rankings, but has now jumped to third, leaping ahead of both Amazon and Alphabet. It's less than 10% away from Apple after starting the year at less than half of Apple's valuation.

Opening call #1

Opening call #2

In an interview with Bloomberg Businessweek Radio on Friday, Cathie Wood pointed out that the semiconductor industry might face a market correction due to improvements in the supply chain.

"The one place we could see a correction — and it's just a correction, we're not calling it the end of this at all — is in the chip space," she said.

Despite being among the top-performing stocks this year, Wood highlighted that the semiconductor stocks, including Nvidia Corporation (NASDAQ:NVDA), could be at risk.

Nvidia’s shares have surged by approximately 80% this year, following a 240% increase in 2023. Wood, who initially invested in Nvidia in 2014, mostly divested her position before the company’s rally last year.

Wood also noted that the shortages in GPUs, which escalated last year with the rise of artificial intelligence tools like OpenAI’s ChatGPT, are now starting to ease. Lead times for GPUs, particularly for Nvidia, have decreased from eight to 11 months to about three to four months.

"So that is suggesting that there was probably a lot of double and triple ordering as the word ‘shortage' was making the rounds, and then those inventories will have to be digested," she added.

The reversal play

Jeremy Siegel, a renowned finance professor from the University of Pennsylvania's Wharton School, previously raised a red flag over the soaring valuations of technology stocks, particularly NVIDIA. Siegel, also known as the "Wizard of Wharton," cautioned that the current enthusiasm for tech stocks, including Nvidia, might be a sign of an impending bubble.

Last month, when Nvidia added $273 billion in value in a single day and made history as it was the most ever recorded, Wood said, “We're just pivoting to another set of plays that most people have not discovered yet. Much like they did not understand that Nvidia was an AI play, really, until very recently.”

Nvidia, of course, can't push the market forward on their own. Interest rates still trump AI - and
 even weight loss - as stock market movers. The biggest question now is when will the Federal Reserve cut. Investors should get more answers on Tuesday, when February's consumer price index is released.

Unlike the stock market, it's best if inflation is subdued.

Weekly options trades summary

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