Dow Jones futures fell modestly Tuesday morning, along with S&P 500 futures and Nasdaq futures, with Nvidia looming large.
The stock market rally held up relatively well this past week amid hot inflation reports. The Nasdaq fell solidly, but off weekly lows. The S&P 500 and Dow Jones declined modestly while the Russell 2000 had a solidly week. All are near 52-week or all-time highs.
Walmart rose modestly on strong earnings despite mixed guidance, while fellow Dow giant Home Depot retreated on weak same-store sales.
Nvidia earnings Wednesday will be a critical test for the AI-led market rally. Nvidia earnings and guidance will have a big impact directly via NVDA stock.
But they'll also likely swing rival Advanced Micro Devices as well as Arm Holdings, Taiwan Semiconductor, Broadcom and Palantir Technologies as well as fellow megacaps such as Microsoft and Google parent Alphabet. At this point, it's hard to find a tech company that doesn't claim to be an AI play.
There's been a lot of froth in the AI space. Super Micro Computer, which tripled in less than a month, staged a bearish downside reversal Friday after showing other climax-type behavior in recent days. SMCI rose modestly before the open.
Investors should consider their exposure not only to Nvidia stock but to AI overall. More broadly, it's a time to be cautious about new buys and consider playing some defense.
Nvidia and Arm stock are on IBD Leaderboard and the IBD 50 list. Nvidia stock is on SwingTrader. Microsoft stock is on the IBD Long-Term Leaders list. Nvidia and SMCI stock are on the IBD Big Cap 20.
Monday News
Capital One Financial will buy Discover Financial Services for $35.3 billion in an all-stock deal, the credit-card companies announced Monday. Capital One stock fell solidly before the open while DFS stock jumped.
The U.S. will award $1.5 billion to GlobalFoundries as part of the U.S. CHIPS Act to boost domestic chip manufacturing. That comes amid reports that Intel could get more than $10 billion in funding. GFS stock leapt on the news while Intel rose modestly.
China EV giant BYD announced significant price cuts on two entry-level vehicles. Several other automakers quickly followed with their own cuts or discounts in the latest round of the China price war.
Dow Jones Futures Today
Dow Jones futures fell 0.35% vs. fair value, with Intel and Walmart helping and Home Depot a modest drag. S&P 500 futures declined 0.35%. Nasdaq 100 futures retreated 0.5%.
The 10-year Treasury yield edged down to 4.28%.
China's central bank cut its five-year loan prime rate by 25 basis points, slightly more than expected. The People's Bank of China left its one-year loan rate unchanged vs. forecasts for a reduction of 15 basis points.
Remember that overnight action in Dow futures and elsewhere doesn't necessarily translate into actual trading in the next regular stock market session.
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Stock Market Rally
The stock market rally held up relatively well despite Tuesday's nasty sell-off on hot CPI inflation data, even with Friday's toasty PPI report.
The Dow Jones Industrial Average edged down 0.1% in last week's stock market trading. The S&P 500 index gave up 0.4%. The Nasdaq composite slid 1.3%.
Market breadth is improving, despite an abysmal Tuesday.
The small-cap Russell 2000 rallied 1.1%, despite tumbling nearly 4% on Tuesday.
The Invesco S&P 500 Equal Weight ETF climbed 0.7% to a 22-month high after finding support at the 10-week line. The First Trust Nasdaq 100 Equal Weighted Index ETF fell 0.6%, outperforming the Nasdaq 100 and just below record highs.
The 10-year Treasury yield jumped 11 basis points to 4.29% following hot CPI and PPI inflation data. Markets now expect four quarter-point rate cuts in 2024, possibly just three. That's down from six, possibly seven, just a month ago. Fed policymakers, who had signaled three 2024 cuts late last year, have been pushing back on aggressive easing.
U.S. crude oil futures rose 3.1% to $79.19 a barrel last week, which is the highest close in three months.
With the Nasdaq's weekly decline, it's 4.2% above its 50-day line, no longer extended but not far being so. In the past several weeks, being 6%-7% above its 50-day has been a trigger for a Nasdaq retreat, if only briefly.
A Nasdaq retreat to the 50-day line could trigger outsized losses for growth names, especially with so many significantly or extremely extended themselves.
Various psychological indicators show bullishness at elevated levels, on the verge of being extreme.
On the plus side, while this is an AI- and tech-led rally, several sectors are showing strength.
ETFs
Among growth ETFs, the iShares Expanded Tech-Software Sector ETF fell 3.2%, with Microsoft a top IGV holding. The VanEck Vectors Semiconductor ETF retreated 1%. Nvidia is the No. 1 holding in SMH, while Taiwan Semiconductor and AMD stock are major holdings.
SPDR S&P Metals & Mining ETF rose 0.8% last week. U.S. Global Jets ETF ascended 1.5%. SPDR S&P Homebuilders ETF dipped 0.35%, with LEN stock a significant holding. The Energy Select SPDR ETF bounced 2.7% and the Health Care Select Sector SPDR Fund rose 1.1%. The Industrial Select Sector SPDR Fund advanced 0.9%.
The Financial Select SPDR ETF climbed 1.4%.
Reflecting more-speculative story stocks, ARK Innovation ETF gained 1.5% last week and ARK Genomics ETF popped 3.2%.
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Nvidia Earnings
Nvidia earnings are due after Wednesday's close. Analysts expect a massive 422% EPS gain. with revenue up 237% to $20.37 billion. Those would be the third straight quarter of triple-digit gains. But investors may be expecting another blowout beat-and-raise report.
If Nvidia sees the AI boom continuing indefinitely, NVDA stock and other artificial intelligence plays could continue their torrid run. But any signs of slowing growth could slam the tech sector.
Shares fell slightly in premarket trade.
Nvidia stock edged up 0.7% to 726.13 last week, its sixth straight weekly gain. It's now the third-most valuable U.S. company with a $1.79 trillion market cap, passing up Amazon.com and Google stock in the past few days. Nvidia is 28% above its 50-day moving average.
Meanwhile, AMD and other AI-inspired chipmakers such as Arm, Broadcom and Taiwan Semiconductor will take their cue from Nvidia earnings. So will software plays such as Palantir, ServiceNow and Snowflake, along with tech titans such as Microsoft, Google, Amazon and Meta Platforms
Those are just a handful of the dozens of stocks that have ridden the AI bandwagon.
AMD has been consolidating for a few weeks, with the 21-day acting as support. Microsoft and ServiceNow are testing their 21-day lines, while Meta is trading tightly after a big advance, according to MarketSmith. Those could offer add-on or new buying opportunities. But many AI stocks are greatly extended, including ARM and Super Micro.
Google and Adobe are exceptions. GOOGL stock slumped 5.7% last week while Adobe plunged 12.8%, both below their 50-day lines, on fears of competition from OpenAI. It's a reminder that AI is not only an opportunity for growth, but a threat for many incumbents, even those seen as artificial intelligence players.
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Super Micro Stock
Super Micro stock shot up 246% from its Jan. 18 close to its Feb. 16 record intraday high of 1,077.87. While too short to qualify as a climax run, SMCI stock otherwise showed climactic action.
SMCI stock gapped up Wednesday and Thursday as part of a nine-day, 73% spike. Thursday's 123.45-point gain was the biggest of the run, while volume hit a new high. The AI server maker closed 136% above its 50-day that day and more than 200% above its 200-day.
On Friday, Super Micro gapped up at the open to the 1,077.87 peak, but then suffered an outside, downside reversal, plunging 20% to 803.32. That undercut Wednesday's low. Friday's volume was much heavier than Thursday's. The daily and weekly point range outstripped anything in the run.
Early Tuesday, Super Micro rose 2% in active trade.
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What To Do Now
The market rally has been strong, resisting significant pullbacks along the way.
However, the Nasdaq isn't far from being extended. There's a lot of AI froth and overall sentiment is highly bullish. Nvidia earnings could be a positive catalyst, but the potential for a large sell-off, especially in hot AI plays, is real.
Investors with heavy AI exposure have to decide if they're able to handle losing a big chunk of their winnings from the past several weeks and months. That depends on your risk appetite, your conviction in various stocks and more.
On the flip side, there are some buying opportunities, though not many outside of earnings gaps. Investors might look to diversify their portfolio with holdings outside of AI and tech generally.
It's definitely a time to be prepared. Have your watch lists and your exit strategies ready. Stay engaged and remain flexible.
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