Market Analysis: Nvidia’s Surge and the Impact on Apple
Last Thursday, Nvidia experienced a surge in its stock price, reaching a new all-time high of $140 per share. This significant increase brought Nvidia’s market cap to nearly $3.5 trillion. Over the past year, Nvidia has tripled in value, although this growth has not been without volatility. Despite this, experts predict that Nvidia will continue to perform well due to its increased weighting in the Select Technology SPDR ETF (XLK). On June 14th, Nvidia’s weighting in the ETF will be boosted to 21%, up from 6%, which is expected to further strengthen the company’s position. However, this surge in Nvidia’s stock price comes at the expense of Apple, whose weight in the ETF is expected to be reduced from 22% to only 4.5%.
Trading Volume and Options Expiration Day
Last week was peculiar due to the holiday-shortened week and the occurrence of Juneteenth on a Wednesday. As a result, trading volume remained light throughout most days. However, options expiration day on Friday proved to be more active, with heavy call option trading driving significant movements in certain stocks. This phenomenon, known as the “option tail wagging the dog,” highlights the impact of options trading on stock prices.
Russell Realignment and Cybersecurity Stocks
This Friday, the annual Russell realignment will be finalized. As a result, many stocks that are added to the Russell indices may experience a surge in their prices on Monday. Additionally, the recent cyberattack on CDK, a software supplier for car dealers, has led to increased interest in cybersecurity stocks like CrowdStrike and Alarum Technologies. Notably, Alarum Technologies experienced a dip in its stock price on Tuesday following an announcement of a decline in its short interest. However, this presents a potential buying opportunity for investors.
Bond Traders and Interest Rates
The benchmark 10-year Treasury rate dropped to approximately 4.2% on Friday, highlighting the influence of bond traders, also known as “vigilantes,” in determining interest rates. This observation aligns with the long-held belief that bond traders have more control over interest rates than the Federal Reserve. This insight provides a nuanced understanding of the factors that impact interest rates and emphasizes the importance of monitoring bond market activities.
Market News and Implications
Several important market news items deserve attention due to their potential implications. Firstly, energy prices are expected to remain high during the summer months but may moderate after Labor Day. There is a possibility that Ukraine may target Russia’s Arctic pipeline, given their previous attacks on Russian refineries and crude oil storage facilities. Secondly, the Biden Administration’s orders to curtail LNG expansion and require “carbon capture” in new power plants pose challenges to energy independence and may lead to potential blackouts during heatwaves this summer. Lastly, the shift towards right-wing parties in the European parliamentary elections reflects growing opposition to “green” agricultural reforms, excessive immigration, and aid to Ukraine. This trend indicates potential cracks in the unity of the European Union.
Upcoming Elections and Investor Confidence
The upcoming French elections and the U.S. Presidential election will be significant events with potential implications for the stock market. Historically, major elections have boosted investor confidence, leading to an increase in stock prices. Both Biden and Trump are making ambitious promises in their campaigns to garner support. Furthermore, weak retail sales and rising unemployment in the U.S. suggest that the Federal Reserve may cut key interest rates by September 18th to stimulate economic growth.
Citadel’s “Mean Revision” Trading Algorithms
The recent brief pullback in Nvidia and Super Micro Computer serves as a reminder of Citadel’s “mean revision” trading algorithms. These algorithms tend to influence stock market movements for approximately 8 months before dissipating during the mid-July earnings announcement season. While dips in Nvidia and Super Micro Computer present attractive buying opportunities, it is important to consider the potential influence of Citadel’s trading algorithms until the second quarter earnings announcements.
Stock Recommendations and Market Outlook
The market analysis concludes with a list of recommended stocks that are well-positioned for the ongoing AI feeding frenzy. These stocks include Eaton, Emcor Group, Quanta Services, SuperMicro Computer, and Vertiv Holdings. Additionally, stocks focused on protecting the electric grid and data centers, such as CrowdStrike, Nutanix, and Parsons Corporation, are highlighted. Other stocks experiencing strong sales and earnings include Eli Lilly and Novo-Nordisk in the weight loss drugs sector, as well as Allstate and Progressive in the insurance industry. Lastly, energy stocks are benefitting from recent heatwaves, high demand, and geopolitical uncertainties.
In summary, the analysis emphasizes the importance of a strong offense consisting of fundamentally superior stocks in today’s market. The upcoming second-quarter earnings season is expected to show an 8% increase for the S&P 500. However, it is crucial for the Federal Reserve to cut key interest rates in the coming months to accelerate economic growth, especially in light of stalled retail sales and a struggling manufacturing sector. Despite concerns and uncertainties, history has shown that stock markets tend to climb a “wall of worry,” suggesting potential for further growth in the current market climate.
