Everyone knows and says there is a bubble on Wall Street associated with artificial intelligence and its high-tech stocks, but no one knows how much longer it will grow or when it will burst. For example, many believe that the stock of Nvidia Corp. is a bubble.
This is based on the fact that the market is under a great delusion, due to extreme high valuations after the stock prices had quadrupled in just one year. Since Arnott’s warning last September, however, the bubble has grown by $800 billion – and the biggest risk right now for traders appears to be staying out of the market.
The risks are scary, but no one wants to miss the AI rally
Wall Street realizes that market risks become scary when all the money is concentrated in a few very high-value stocks. However, since Nvidia reported financial results that beat expectations last week, the AI rally is one that no one can afford to miss. No one sorts out the tech giants anymore. Analysts’ price targets are rising.
Aggressive placements
As a result, positions, from hedge funds to individual investors, are becoming increasingly aggressive. Right now, nobody believes in the bearish scenario. This is not how investors move if there is a basis for the market to fall.
For active managers, the pressure is mounting by the day to chase upward momentum in the benchmark S&P 500 and Nasdaq 100, which rose for the 15th time in 17 weeks. The tech Nasdaq 100’s price-to-earnings ratio climbed more than 30 times, a figure with few historical precedents. E.g. we saw this during the dot-com craze of the late 1990s.
Traders closed short positions
Due to the surge in earnings and the sense that it’s futile to sort the Magnificent 7, the rally in tech companies has not been accompanied by an increase in short positions. Traders closed short positions.
Short bets have fallen to just 1% of the group’s existing positions and are at their lowest level since at least 2015. Nvidia’s 16% gain last Thursday 2/22 caused $3 billion in losses for those still holding bearish bets on paper.
Nvidia stock
Nvidia stock is also in huge demand from individual investors as well. However, even in the midst of a record rally, Nvidia does not appear to be in a bubble due to its big earnings growth from 2023.
The stock’s gallop also attracted buying momentum from a host of individual investors. Nvidia currently has the highest demand since March 2020. The artificial intelligence chip maker reported a 486% year-over-year profit increase, excluding some items in the fiscal fourth quarter.
The company also announced that for the first quarter it expects revenue of $24 billion. In turn, bulls have been quick to boost their price targets – their average price target for Nvidia is now $863, which means they see the company as having 9% upside.
Take 20% of your winnings off the table
While Nvidia lifted the major indexes, gains were spread across select stocks. Less than 70% of stocks on the New York Stock Exchange rose, while the S&P 500 rose 1.7% for the week. This is bad news for those who have bet on an extension of the rally fairly soon.
Reducing a portfolio’s exposure to Nvidia should also be done to collect some of its profits. Prudence dictates that we take 20% off the table. In this case, if in the next few weeks there is a slowdown or the stock goes back a little, the position of the portfolio in the particular stock may have to be strengthened again.
