Semi Stocks Surge While Stock Market Stalls

The Nvidia led Artificial Intelligence (AI) revolution found new life this week, sending large cap tech sector stocks soaring and propelling the SP to its first record high in 2 years. The positive announcements keep feeding the Bull. Nvidia (NVDA) reported new chip rollouts for China, a huge order from Meta (Facebook) and a strong report by Taiwan Semiconductor (TSM). For those living under a rock, TSM makes the semiconductor chips for Nvidia, Apple, AMD, Broadcom, and many others. Just as NVDA dominates chip design for generative AI, Taiwan has an even wider moat around its semiconductor production supremacy. TSM makes over 90% of the world’s most advanced chips and is building new fabrication facilities in Taiwan and the US. While AMD and all the mega tech stocks are producing or designing new AI chips, NVDA will stay on top during this economic cycle. Their stock has added a Trillion in market cap while more than tripling in price over the past year. Watch for periodic Chinese war threats to take this stock 5 to 15% lower for short-term buying opportunities. Seasonality says to expect a 600+ interim NVDA top in February to fade and a mid-March low to add.

Without Nvidia leading the tech sector higher this week, the major indices would all still be in correction mode for January. We did not favor a tech breakout that led to new highs so soon after just a brief 2% early January pause, but the positive news and overweight money managers continue to add tech stocks on any catalyst they can find. While some minor seasonal weakness is favored next week, a new record high in February remains our outlook before the larger correction is due to bottom near mid-March.

The caveat for Q1 is that optimism is very high, and investors are moving to one side of the ship. Q1 of election years is typically the weakest. Consensus expectations for lower interest rates and inflation without a recession are high. While we still favor a positive 2024 outcome, along with the majority, these sentiment metrics indicate that markets are vulnerable to negative news. For now, the concern of economic recession with rising unemployment continues to fade away.

Money managers moved to 103% equity exposure with leveraged longs at the end of December. As with last June when AI became the craze, we may be seeing a premature warning of over-optimism with equity positioning. Sentiment metrics can’t be used as a precise oscillator, yet they can provide a backdrop of vulnerability to negative news when everyone is fully invested. For now, stock market exposure by managers has moved back to neutral, allowing for another run to new highs. As we saw last June and July, we may need another upturn in equity exposure sentiment before a >4% equity correction becomes a high probability. The next resistance zone for the tech heavy SP 500 Index is now the 4900 – 5000 zone. 




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