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Mark Twain once said that "History never repeats itself, but it does often rhyme."
There are several periods in the market's history that have followed that saying to a "T".
And when that happens, there's always an opportunity to profit.
Believe it or not, the years 1634 through 1636 are singing in perfect harmony with the current trends in Artificial Intelligence or "AI". That's right, AI stocks are following a pattern that dates back almost 400 years.
That pattern will provide prepared investors with what may be the last opportunity to grab AI stocks before they make their real move.
That's right, I said real moves. We've not seen anything yet.
Microsoft (MSFT) shares are up 40% this year. But there's more.
Alphabet (GOOGL) shares are trading 50% higher for the year, but there's more.
NVIDIA (NVDA) shares are up more than 200% this year. But there's more, a lot more.
There's more because of what tulip bulbs did almost 400 years ago.
Here's the chart. You may have seen it before, maybe not. But this is the pattern that all innovation-driven bubbles follow.
Tulipmania - as it is referred to as - is considered one of the most famous market bubbles.
Those with a keen eye may have even caught it hanging in the background during some of my live sessions.
The drivers of the Dutch Tulip Market Bubble are the same that drove the .COM bubble and then the 2007 housing bubble.
They're the same drivers that are now building the AI Bubble.
Investor sentiment and psychology is at the heart of the pattern. That sentiment is fed by the evolution of this technology and its adoption into the marketplace and economy.
That's the reason that this pattern hasn't changed after almost 400 years. You can't change the psychology of investors. It's coded into our "trading minds".
Here's the chart of NVIDIA following that same pattern.
So far, two of the more notable "phases" of the rally have played out. The "Awareness Phase" and the "Media Attention Phase".
The media attention phase is one of what I refer to as the "tipping points" for a stock (or market) as this is when the average investor is made aware of an innovation and the opportunity to invest in its future.
We've seen that play out perfectly over the last year. Everything from headlines in the media to tracking the count of how many times the term "AI" is mentioned in an earnings conference call (chart below).
And then there's the media mentions.
This media attention has put AI on the investing radar of the average investor, driving prices to their second of three peaks.
The next move will be lower according to history, and that's where the real opportunity will present itself.
Follow me on this, because it leads to that opportunity I'm talking about.
We're hearing rumbles of a bubble in AI as the media compares the recent rally to what we saw in the late 1990s as the .COM bubble was being inflated.
What they don't recall, or report, is that there was the exact same pattern then.
We'll use Intel as the example as it was the king of Semiconductor companies during that cycle in the market.
Note the Awareness and Media Attention phases in this chart. They match the same patterns we saw in the Tulipmania chart.
The Tulipmania chart saw a 40% decline after the Media Attention phase.
The .COM Media Attention phase was followed by a selloff that dropped Intel's share value by 35%. That top occurred a full 18 months before the .COM bubble burst.
That 35% pullback was the last opportunity to take part in the .COM rally before the bubble burst. And if you had - as I did - the returns were epic.
Intel (INTC) rallied 300% through the final stage of the pattern.
Apple (AAPL) shot 350% higher.
200% for Cisco (CSCO) shares over the same period.
175% for Hewlett Packard (HPQ).
And 150% for Microsoft (MSFT)
My newest service - Long-Term Equity Profits - provides a way to capitalize on this historical pattern as it gets ready to emerge once again, you can check out what I'm doing in that service right here.
Here's the way I see things playing out over the next two years.
First... Yes, we are going to see a deep pullback in AI stocks sometime in the next six months.
The media attention that has been showered on these stocks has done exactly what it did for tulip bulbs and semiconductor stocks... driven the market's excitement to a short-term top.
The next phase will include doubts over AI, regulatory activity and profit taking.
These are the same type of hurdles that previous innovation rallies have faced and the effect is likely to be the same. A 20-50% drop in AI stocks.
So two weeks ago I was asked during my monthly call with my Long-Term Equity Profit's subscriber why I hadn't added the biggest AI stock of them all to my portfolio yet.
The reason is simple.
The Media Attention phase is waning, which suggests that we're going to see a 20-50% pullback in NVIDIA (and other AI stocks of course).
I'll strike on that opportunity as it develops as this will be the last stop for the AI stocks before they make their historic blowout move to the real "Bubble Top".
Here's the chart of NVIDIA again, this time with my current targets.
Long story short, I plan to allow the crowd's selling of this overly crowded trade to increase when NVDA breaks below $425.
From there, the stock will search for a technical support level. $375 will be the first round of buying that we see from the crowd as the stock will be "on sale" from its all-time highs. The discount, 25% off.
That's where I will make my first - and heaviest - round of long-term buying. Leveraging the move with Long-Term Equity Anticipation Securities, commonly referred to as LEAPs.
This approach will allow me to take my position with less capital while still affording my portfolio the flexibility and the opportunity to profit 10X or more over holding the shares themselves.
It's a cool approach, and one that I love for not only NVIDIA, but all AI stocks.
Finally, I will use the same strategy to lower my costs on the stock even more should NVIDIA shares fall to my next technical level of $325.
I see this as the Maginot Line for NVIDIA stock and frankly, would be an eager buyer if that price were to grace my watchlist screen.
That's it, the history of the market's very predictable pattern and how I'm using it to get ready for what may be the biggest personal allocation into the hotter than hot AI sector.
The pattern matches up with about ten other stocks associated with AI, so I'm looking at a target rich environment to develop over the next six months.
Check back with me as I monitor each and every one of these stocks for that once in a decade opportunity.
Or better yet, Join me
As always, I wish you the best trading success!
The post Tulips Are Telling Me How To Trade the Next 300% rally in AI appeared first on Penny Hawk.
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.