@theMarket: Nvidia's Earnings Could Not Save the AI trade

Markets were poised for a bounce, and Nvidia delivered. The AI semiconductor giant beat earnings handily, and its forward guidance was even better. The company's stock spiked higher and then fell. Where Nvidia goes, so goes the market. 

 

After four down days in a row, Thursday saw all the main indexes gain more than 1.5 percent, with the tech-heavy NASDAQ gaining 2.5 percent. It was a classic dead-cat bounce. The sigh of relief from the bulls could be heard across markets worldwide, as this single stock's third-quarter results were important enough to lift most stocks. But the respite proved temporary.

 

By mid-morning Thursday, the AI darling began to falter, giving back all its gains and then some. Readers should know that here in the U.S., Nvidia makes up 8 percent of the benchmark S&P 500 Index, and together with 19 other stocks now represents 50 percent of that index.

 

As I wrote recently, investor concerns that too much money was being spent on AI with no returns in sight returned to the forefront, even though the company's CEO, Jensen Huang, said sales of its newest chip were off the charts. Investors didn't care, and markets across the board were down at least 1 percent at the closing bell Thursday afternoon. 

The excitement over Nvidia's results completely overshadowed the first non-farm labor jobs report since the government shutdown, at least at first. The U.S. economy supposedly added 119,000 jobs in September, which was above economists' estimates of 50,000. In this market, that data was so stale it should have been next to useless, but something, no matter how old, is better than nothing.

 

And even if the numbers were up to date, many on Wall Street have come to doubt the objectivity and integrity of government data. The Bureau of Labor Statistics claims it can't capture the data to release October's results, or that the results may only be partially available. Is that a coincidence, given that the mass layoffs in the government sector would have shown up in that month's data?

 

I do not remember these data glitches happening in past shutdowns. It begs the question: has the BLS suddenly become more incompetent since the firing of its last head, or are statisticians being coached by outsiders?

 

In any case, the bears took the numbers and ran with them, claiming that stronger payroll numbers will convince the Fed to hold off on cutting rates until more information becomes available. The next payroll report will be delayed until the middle of December (another coincidence). This leaves the Fed without the data they need to make an informed decision on interest rates in time for the Dec. 9-10 FOMC meeting. In which case, any decision they make will be at best a guesstimate. I am betting they cut interest rates.

 

In the meantime, I promised volatility in November, and that is what markets have delivered. As the lion's share of robust corporate earnings results has faded, support for equity indexes has faded with them. As such, equity indexes draw ever closer to my downside targets. Bitcoin and other cryptocurrencies are leading the markets lower. I had warned investors to expect a pullback in this asset class. We are getting it.

 

Traders are using Bitcoin as a leading indicator of investors' risk level. Given its speculative nature, the fall from $126,000 to its current level (below $84,000) is a clear indication that market sentiment is definitely risk-off. I see a bottom for Bitcoin around $74,000-$76,000.

 

Precious metals, another speculative asset class, are holding up a lot better. This is another area where I advised readers to expect a decline and be cautious in adding to dips. Although volatile, gold is down about 10 percent from its highs and is still consolidating after its spectacular gains this year.

 

Both crypto and gold will make no headway until the U.S. dollar turns down once again. Heading into Thanksgiving week, markets are approaching my target levels. NASDAQ has declined by about 8 percent while the S&P 500 Index is down less than half that. I expected a 4-6 percent decline, so my downside risk from here is about 1.5 percent for the S&P.

 

What could save the markets from further downside would be an interest rate cut when the Fed meets in December. I suspect that will happen given my scenario of better inflation numbers in the next two months and a somewhat weakening employment picture. Until then, stay invested, grin, and bear it.