Nvidia's Blowout Earnings Provide a Good Sell On the News Opportunity

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As was widely expected, Nvidia reported another very strong quarterly earnings report after the market’s close, yesterday. Nvidia reported second quarter revenues of $13.51 billion, handily beating the $11.04 consensus expectation. And earnings-per-share was $2.70 per share, also handily beating the $2.07 expectation. Furthermore, Nvidia issued third quarter revenue guidance of $16 billion, far outpacing analysts’ consensus expectation of $12.5 billion in revenue next quarter.

The stock immediately jumped about 7% in after-hours trading on the report, reaching a high of $518 in after-hours trading after closing at $471. However, it didn’t take a keen eye too long to see that some cracks were showing in the rally. There was significant selling into this rally, unlike last quarter’s post-earnings rally where every offer was quickly gobbled up, and Nvidia started pulling back to finish Wednesday’s after-hours trading $14 off its high.

Then, after being up strong all night, index futures started pulling back fairly significantly as we neared the open of regular trading today. Nvidia opened regular trading at $502.16, and then it was all downward from there (selling into the rally), with $502.56 being the high of day and the stock closing at $471.63 to finish up just .10%. That was $47 off its after-hours high of Wednesday.

I watch the tape very closely throughout the day as it provides a smorgasbord of clues as to pockets of and strength and weakness —buying and selling pressure.

In my August 22nd newsletter (Tuesday), in which I previewed Nvidia’s upcoming earnings report, I wrote that I’m actually much more interested in how other AI-related stocks reacted to Nvidia’s earnings report and guidance, more so than Nvidia’s stock price itself, because that is what will really shed big clues about the market’s overall risk-on or risk off appetite. And I cited 5 prominent AI-related stocks to watch to gauge this: Microsoft, Google, Marvell, Palantir and c3.ai. While all 5 stocks opened up at the start of regular trading along with the tech-heavy Nasdaq, those stocks quickly reversed down and turned negative, leading to some big losses on the day — especially for the latter 3 smaller companies.

While Nvidia finished just slightly positive on the day, Microsoft finished down 2.15%, Google down 1.96%, Marvell down 6.85%, Palantir down 7.58%, and c3.ai down 11.56%. In other words, the market-action demonstrated early and through-out the day that there was heavy selling in AI and tech, as well as the broader market. The tape was screaming risk-off.

The Dow finished down 373 points, or 1.08%, the S&P 500 down 1.35%, and the tech-heavy Nasdaq 100 down 2.19%. Most of the major indexes, and countless individual stocks, put in big reversals and bearish engulfing candles on their charts. It’s an ominous sign for the market. The important S&P 500 index put in an ugly bearish engulfing candle. My downside target for the S&P 500 has been a test of 4200 level, and then I’ll evaluate things from there.

The mega-cap tech-heavy Nasdaq 100 also put in an ugly bearish engulfing candle. My down-side target for the Nasdaq 100 has been the 13,750ish area, and then I’ll evaluate the landscape if/when we reach there.

The semiconductor sector also put in a big downside reversal today, on heavy volume, and finished down 2.59%. Significant semiconductor weakness is something market bulls never want to so see.

After pulling back yesterday, and helping to fuel yesterday’s big tech stock rally, the 10-year Treasury yield was back up today — helping to fuel some of the selling pressure. The further the 10-year yield rises from here, the more equity market selling pressure it will induce (and vice-versa).

And problematically, the dollar was up strong today and is breaking out of its medium-term downtrend channel. There has been a strong inverse-relationship between the dollar and stocks since the market topped at the beginning of January 2022.

Federal Reserve Chairman Powell will be speaking at the Jackson Hole, Wyoming, conference tomorrow morning. I suspect that he will provide generally even-handed and remarks about the Fed’s fight against inflation. He will likely outline the progress that has been made on the inflation front, but acknowledge that the economy has been showing surprising strength and the unemployment rate is still near a 50-year low.

Thus, he’ll stress that the Fed has to be cautious about letting its foot off the brake too soon and risk allowing the inflation rate, currently at 3.2%, to potentially work its way back higher. As usual, he’ll reiterate the Fed’s determination to bring the inflation rate down to its 2% target. Unless Powell throws a sharp curveball, I don’t think his comments will have a material effect on the market’s downward trend.

Now, on to a new/updated focus watchlist. All stocks on the focus watchlist are shorts, given the market’s downtrend and stiff risk-off nature. They’ll be greener pastures down the road for long-side trades.

Focus Watchlist

I try to recommend trades that are timely and that a breakout/breakdown is likely to happen soon. If I take a stock or ETF off the focus watchlist, it may be because the trade needs more time to ripen, it ran away from us, or I’m no longer considering it at all. During earnings season, I avoid trades that involve near-term earnings releases.