Stock market’s AI frenzy reinforces this crucial rule for traders, RenMac says

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A mind-blowing Thursday surge by shares of chip maker Nvidia Corp. that fed a frenzy for artificial-intelligence stock market plays reinforces a cardinal rule for traders, said a technician at a top Wall Street research firm.

“Yesterday’s move in NVDA was one for the record books,” said Kevin Dempter, analyst at Renaissance Macro Research, in a Friday note. It also served as an example of the rule the firm preaches above all others, he said, which is to “‘not fear momentum.’”

Shares of Nvidia
NVDA,
+1.82%

jumped 24% Thursday, putting a $1 trillion valuation in sight, after it delivered a blowout earnings forecast centered on soaring demand for chips related to artificial-inteligence applications. That built on an already staggering upside run for the stock, which is up nearly 160% so far in 2023.

“Just because a strong stock or sector is overbought after a big run doesn’t mean you should sell it. Strength begets strength and the rich get richer, embrace momentum,” Dempter wrote. (See chart below.)


Renaissance Macro Research

Nvidia shares added another 2% on Friday, while the megacap-tech-concentrated Nasdaq-100
NDX,
+2.28%

was on track for a 3.1% weekly gain, up more than 30% for the year to date. The S&P 500
SPX,
+1.16%

was up 1.2% Friday, turning positive on the week and up around 9% for the year as it traded near the top end of its recent range near 4,200.

See: ‘Unprecedented’ and ‘unfathomable.’ Nvidia makes jaws drop on Wall Street as stock explodes higher.

So should investors chase the rally? Not so fast there, either.

Dempter said RenMac still wouldn’t fade the move, but it might pay now to be patient and let overbought conditions get worked off before looking to add positions.

He noted that the rally comes amid a list of understandable reasons for caution. The breadth — the number of stocks advancing versus declining — continues to weaken, with just 37% of the issues in the broad S&P 1500 index above their 200-day moving average and new 20-day lows outnumbering 20-day highs. The equal-weight measure of the S&P 500 recently witnessed a “dark” or “death” cross in which the 50-day moving average falls below the 200-day moving average.

And the AI rally has some market watchers pondering if another bubble may be in the works.

Fidelity’s MSCI Information Technology ETF
FTEC,
+2.33%
,
which allocates 23% to Apple,
AAPL,
+1.25%

19% to Microsoft
MSFT,
+1.98%

and 6% to Nvidia was up by more than 3.5% Thursday, and 40% since last October 2022 dip. It currently trades 30 times the earnings, while the S&P500’s price-to-earnings ratio is only around 22, noted Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a note. She observed that Nvidia’s P/E ratio spiked to 219 Thursday.

It all points to a “bubble in the making” for AI-related stocks, she said, warning that it “could soon be time for a correction.”

Dempter said that despite broader market concerns, “we still want to embrace those areas that are breaking out [with] momentum. It may be narrow, but we would remain overweight tech and would stick with the leaders while embracing improving trends in the sector,” he said.

It’s hard to say how the AI boom will play out, but Dempter argued it’s smart to stay long the names that have already benefited most.

Need to Know: AI stocks are soaring but average investors aren’t yet rushing in

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