Nvidia just reported its third consecutive earnings report without a significant market reaction.
The stock didn’t do much when they reported back in August and November of last year. And it’s not doing much again today, trading down by less than 1% after-hours.
As for the technical outlook, nothing changes. Nvidia is still stuck in the same range it has been trading in since last summer.
JC and the guys did a live event to discuss the earnings numbers and the stock’s reaction after the bell today. You can rewatch it here.
We only hold these events when there is something big to discuss, and the truth about NVDA is that it is far and away the most important stock for the overall market.
And it’s less about anything specific to do with AI or Nvidia’s business, and more to do with the stock's massive weighting in the major averages and indexes.
Semiconductors are the most critically-important industry group in the market. If we lose the semis, and we lose NVDA, we probably lose the bull market altogether.
Let’s talk about the chart levels I’m watching to determine the health of NVDA and friends.
First, here’s the VanEck Semiconductor ETF SMH:
NVDA is a roughly 18% weighting, while TSM makes up 13% and AVGO another 9%. It’s quite top-heavy in the largest semiconductors, but it’s the best index as it paints a cap-weighted picture of the global semiconductor industry.
Like NVDA, SMH has made zero progress since May of last year. It is trading in a wide range anchored by the highs and lows from the back half of last year, along with some Fibonacci extensions.
I’ve anchored a VWAP from the August lows which has already acted as support a handful of times in recent months. If we’re above it the bias is higher, back to the upper bounds ~280.
If we violate this VWAP, we’re headed back to the lower bounds ~200. If we break below there, this will be a top and a new primary downtrend, and we’ll be talking about the end of the bull market.
On the other hand, if we break out above 280, the stock market is probably experiencing a new rally phase and all is good in risk asset markets. These are two very different scenarios.
I think NVDA and the semis eventually resolve higher and hit a few more targets before it’s all said and done.
Here are some things I’ll be looking for as confirmation that this is where we are headed.
The equal-weight SPDR Semiconductor ETF XSD should hold its August VWAP and finally book this breakout above the prior-cycle highs.
As you can see, we’re right there. A few good weeks is all XSD needs.
Another thing I expect to happen in an environment where semis are breaking out again is for the group to reassume their old leadership role.
I think this massive dot-com bubble base in the SOX vs SPX ratio needs to stick the landing above those 2000 highs.
That would mean some renewed relative strength out of these early cycle leaders. We haven’t seen that kind of thing since Q2 last year.
Now, what’s happening in the event semiconductors roll over, and SMH completes that top around 200?
You are going to see completed tops in the relative trends first. Here are the ratios of both XSD and SMH relative to SPY:
XSD is sporting a 4.5-year top versus the broader market, while SMH is working on a smaller, 12-month top. If one of these breaks down, the other is likely to follow.
If this happens, and these relative trends top out here, the absolute trends could be next. This would be the warning signal for it.
So, that’s it. I don’t think we lose the most important risk-on stocks in the market in the middle of a bull cycle where breadth is expanding around the globe.
But, I am open to it. These are the things I’ll be watching to tip me off where semis are headed next.
