Like you I’m sure, I’ve looked at every angle when it comes to NVIDIA (NVDA) and where the stock is likely to go over the next few months.
Obviously, earnings are the number one factor. We’ll see those number in just two weeks as NVIDIA reports their quarterly results on August 28.
Historically, we’ve seen investors want to buy shares of NVIDIA ahead of their earnings report.
On average, NVIDIA shares trade 8% higher in the weeks ahead of their earnings report. The reason? Investors have been afraid to miss out on an opportunity to ride the shares higher after the earnings hit the tape.
It’s what we call a “buy the rumor rally”. They’re historically powerful because they represent what is often the biggest fear on Wall Street, the Fear of Missing Out (FOMO).
These rallies have become even stronger over the last four years as investors’ attention towards the market, and the Magnificent Seven Stocks, has been magnified in the wake of the Pandemic Trading craze.
NVIDIA’s earnings have a strong history of beating analyst expectations, driving the stock as much as 30% higher in the two weeks following the earnings results.
Over the last five years, NVIDIA shares have traded higher 64% of the time after the company’s earnings results, regardless of the results.
Those moves higher average a magnitude of 13.1% over a two-week period.
NVIDIA’s average move during ANY two-week period over the last five years, 3.3%.
So, NVIDIA stock moves nearly four times higher after its earnings report 64% of the time. That’s a lot of FOMO.
NVIDIA shares are trading more than 20% off their recent highs as the AI industry is starting to fall under some scrutiny.
Last quarter, companies like Salesforce.com and IBM shed some light on the AI business, pointing out that customers that used (not created) AI were slowing their purchases of AI services. In addition, we saw a few of the AI chip companies point to some slowing demand.
More recently, \earnings reports from Microsoft (MSFT), Alphabet (GOOGL), AMD (AMD), and other leading edge AI companies failed to impress investors with their earnings outlook after delivering results that were good but failed to really impress.
That’s why NVIDIA and the rest of the Magnificent Seven stocks can’t get traction in this market.
I call it the Four Stages of a rally of Decline.
The simple sine wave explains the sentiment that investors go through during a rally or decline.
The chart applies to a stock, index, the market in general, anything that involves a large group of investors.
NVIDIA is in the middle of one of the most critical stages in this pattern, Denial.
Analyst and investor’s expectations have been through the roof to the point that they don’t think that the stock can fail. It can.
That “can’t fail” sentiment is a signature of a stock that has hit the “Euphoria” stage. Counter to what you might expect, the Euphoria stage is bearish for a stock.
This goes to the heart of Warren Buffett’s quote “to be fearful when others are greedy”. There is no other stock that the market is greedier over than NVIDIA.
That “Euphoria” phase started forming after NVIDIA’s last two earnings reports.
Over the last month, NVIDIA shares have declined more than 25% from their highs.
The stock is trading below its 50-day moving average. The 50-day is one of the most widely watched trends in the market. It embodies the phrase “the trend is your friend”.
Last week, for the first time since April 2023, the 50-day moving average shifted into a bearish trend, suggesting that NVIDIA is still in the process of correcting.
The shift in NVIDIA’s price trend is now being met with headlines that are sowing a few seeds of doubt.
Last week, Reuters and Bloomberg reported on the potential that NVIDIA’s newest chip “Blackwell” was facing challenges and could see delays. That news would be critical to NVIDIA’s earnings report at the end of the month.
Despite the price trend and headlines, investors and analysts have been aggressively defending NVIDIA during this period.
Nine major analysts have raised their price targets for NVIDIA while reiterating their “buy” recommendations.
That’s “Denial”, and it’s not good for NVIDIA’s outlook.
The next two stages are the ones that create a true buying opportunity for NIVIDIA.
“Acceptance” is the point in the “Sentiment Cycle” when investors have enough doubt that they accelerate their selling of the shares.
This stage is likely to come when the company announces their earnings results.
For what it’s worth, one analyst recently dropped their outlook for NVIDIA from “buy” to “hold” citing that the stock had been overvalued by the market. That’s a sign that some acceptance is forming on NVIDIA.
As it stands now, the stock is still priced for perfection. Investors will expect that Jensen Huang will blow their expectations away, again, and raise the company’s outlook for the next quarter, again.
Any deviation from a perfect “beat and raise” earnings report will force investors to accept that their expectations have been too high along with a revaluation of the stock price.
From there, the heavy selling would lead to a “Despair” situation that would mark an intermediate-term bottom for NVIDIA stock.
That’s your true buying opportunity moment.
Going back to Warren Buffett’s quote,
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
The market will turn greedy on NVIDIA shares as it approaches the $80 price, a 40%+ decline from the stock’s highs in June.
$80 represents a level that fear and the stock’s price chart may form a buying opportunity.
$80 is roughly 25% below today’s price which would serve as a staunch reality check from the sentiment perspective. Another 25% drop in NVIDIA will certainly serve as a “fearful” drop.
That drop would also move the stock below $100.
NVIDIA shares have been bouncing around the psychologically critical $100 price for the last three weeks. A significant break below $100 will cause fear-based selling to develop.
From a technical perspective, NVIDIA’s 200-day moving average is currently sitting near $80. Along with the 50-day, the 200-day is also one of the most important trendlines for investors.
From here, NVIDIA shares would face a “must win situation. A break below the stock’s 200-day would turn the current correction into something not seen since 2022 when NVIDIA lost roughly 70% of its value.
For now, the market and NVIDIA remain in long-term bullish trends. That suggests that $80 should be as deep as NVIDIA goes before reversing back into their long-term bullish trend.
