Analyzing Market Trends: Impact of Nvidia's Earnings and Broader Market Movements
Market Commentary/Forecast - May 24, 2024
As I mentioned yesterday, one stock does not make a market—even if that stock is Nvidia, which reported blowout earnings on Wednesday and is spearheading the AI revolution.
Despite Nvidia's incredible earnings announcement, markets experienced a sharp decline in Thursday's "sell the news" session. The Dow Jones Industrial Average, which does not include Nvidia as a component, suffered its worst performance in over a year, plummeting more than 600 points, translating into a 1.53% loss. This drop occurred despite the impressive earnings from Nvidia, whose stock price still surged 9% on the day.
In contrast, the S&P 500 fell 0.74%, and the Nasdaq Composite dropped 0.39%. Both indices were partially buoyed by Nvidia's inclusion in their indexes.
This market disparity highlights the widespread weakness and negative breadth, as evidenced in yesterday's heatmap of the S&P 500 sectors.
Understanding Market Breadth and Sector Performance
The heatmap shows a visual representation of market performance by sector. Yesterday's data highlighted significant weakness across most sectors, despite Nvidia's strong performance. This phenomenon, often termed "sell the news," indicates that despite good news from a major player, broader market sentiment can still turn negative due to other factors.
The Impact of Nvidia's Earnings
Nvidia's blowout earnings and subsequent 9% stock surge demonstrate the company's pivotal role in the AI sector. Nvidia's growth in its data center business, which saw more than a 400% increase year over year, underscores the expanding influence of AI technology. However, the broader market's decline despite Nvidia's performance suggests that investors are cautious about the overall economic outlook.
Federal Reserve's Influence on Market Trends
In Fed minutes released yesterday, we see how FOMC members lacked confidence that it was time to cut interest rates. They unanimously decided to keep the Fed rate unchanged from where it halted last July 2023. This decision impacts investor sentiment, as the prospect of unchanged interest rates may lead to prolonged periods of market uncertainty.
Managing Volatility with Layered Stop-Loss Orders
Cyclically, indices are still in the projected choppy period, but if the last 30-day trend persists, even this chop could continue to have a mild upward bias due to the market cap of tech companies (the Visualizer DPO shows cycles trending down, however). Short-term cycles on our SPX Forecast chart have started forming a weaker pattern of 'lower highs,' while the Dow also has a weaker short-term cycle that has already dropped full-scale to the lower reversal zone on its chart.
June 10 continues to be projected as an intermediate top. Until then, we want to keep raising our protective stops under key support using a 2/3, 3/5, and 4/7 crossover average as our exit points. Look for a bounce on the NASDAQ today, which is unlikely to be as strong as on the SPX or Dow.
Key Dates and Economic Reports
May 29th: U.S. markets will be closed in observance of Memorial Day.
June 2nd: Personal Consumption Expenditures (PCE) data release.
Projected Market Movements
Despite the poor market breadth and intense selling pressure witnessed in the Dow, we will likely see a momentum-driven bounce and relief rally across all three major indices today. However, this reprieve is expected to be short-lived. Market projections indicate equities will likely remain mildly weaker and choppy until early June, followed by a modest rally after June 4th and culminating in a cyclical top around June 10-12th.
Trading Strategies for Current Market Conditions
Implement Layered Stop-Loss Orders: Protect your investments by setting multiple stop-loss orders at different levels. This strategy helps secure partial profits while allowing for potential gains if the market continues to rise.
Monitor Economic Indicators: Keep a close eye on key economic reports, such as the PCE data, which can provide insights into inflation trends and influence market movements.
Diversify with ETFs: Leveraged ETFs, such as TQQQ (Nasdaq) and SPXL (SPX), offer broad exposure to market indices and can help mitigate the risks associated with individual stock performance.
Stay Informed on Market Leaders: Companies like Nvidia, which lead their sectors, can significantly influence market movements. Keeping track of their performance and earnings reports can provide valuable insights.
Conclusion
Successfully navigating the stock market requires a blend of timing, strategy, and patience. By understanding market trends, monitoring key earnings reports, and using tools like Market Turning Points, traders can maximize returns and protect their investments during volatile periods. Leveraged ETFs like TQQQ and SPXL offer a simplified way to gain exposure to entire indices, making them a valuable tool in any trader's arsenal.
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