☕ Why Nvidia’s down after great earnings and what to do about it
Aug 29, 2024Good morning! 👋
And boom, right on cue.
The Nasdaq looks set to rebound as do the Dow and the S&P 500 despite Nvidia selling off on the heels of stellar earnings.
Matt B. wrote in yesterday asking why and “how can I use this as a learning experience?”
Smart question, my friend!
Let’s talk about that.
We’ve got a great teaching moment on our hands.
A tremendous number of folks have joined the 5 with Fitz and One Bar Ahead® Family recently – welcome!
For many newbies, this’ll be your first lesson in how things really work and why knowing that information can help make you a significantly more successful investor. It’s also an important reminder for those of us who have – ahem - been around the block a time or two.
Great earnings used to be a cause for celebration and a strong buy signal. But lately as many nervous-Nellies have discovered the hard way, more often than not they’re now a precursor to a short-term rug pull that separates the weak money from the strong.
Particularly when it comes to companies like Nvidia that report great earnings but drop anyway before reversing sharply higher leaving a lot of people on the sidelines and poorer for the experience.
There are a couple of layers so hang with me.
First (and I apologize for being so blunt) you’ve got to understand that any dolt with a keyboard or access to Twitter and YouTube can blather on about stocks.
The problem with that is that the vast majority of ‘em have no experience whatsoever running real money or have ever set foot on a real trading floor. Yet have huge followings.
I won’t pull any punches because they’re a nuisance and can have a devastating impact on your finances if you listen to ‘em.
Don’t take my word for it, though.
A recent study from the Swiss Finance Institute found that of the more than 29,000 so-called “finfluencer” accounts they reviewed, an overwhelming percentage were anti-effective, meaning that anybody taking their advice or following along lost money.
What’s more, betting against “antiskilled” finfluencers, furus, hypesters – whatever you want to call ‘em - led to a 1.2% monthly alpha (meaning better returns).
And that imho also includes people writing very popular newsletters who shall remain nameless that are really little more than tip sheets and click bait masquerading as real research. Same goes for people you see a lot on TV who have never run real positions.
To paraphrase the Grail Knight in Indiana Jones and the Last Crusade, “you must choose wisely.”
Second, remember how the game is played.
Nvidia dropped after great earnings because go-fast traders are playing YOU, not Nvidia.
You and I, on the other hand, are playing Nvidia.
It’s not personal; that’s their job.
YOURS (and mine), on the other hand, is to build wealth.
- The big money crowd knew the numbers would be good exactly as I told you they would. So they set up a run into earnings because they also knew that would create FOMO (Fear of Losing Out) and bring more people (they could fleece) to the party.
- They sold immediately after great earnings because they also know the vast majority of individual investors think great earnings mean higher prices right away and their buying creates an easy exit for quick profits.
- Then, they took prices straight down in the overnight market to blow out trailing stops lurking in $115-$117 area, a price point I identified to the OBA Family in Monday’s update. NVDA, btw, has opened slightly lower this morning which makes me think they’re not quite done “shaking the weak money out.”
A couple of things to think about.
Mechanics matter – meaning how the markets work. The markets are not a closed loop so it’s a mistake to think about ‘em that way.
Every seller has a buyer and in situations like this, I can all but guarantee you the same folks who just rattled the unsuspecting into selling, are buying.
Exactly as I hope you are.
Remember two key Keithisms or FitzWit as some have taken to calling my Bottom Line missives.
- Chaos creates opportunity.
- Think like a shark, not a minnow.
Keith’s Quick Tip: The next time we head into a big, widely anticipated earnings report, take a quick look at the options chain. If you see outsized open interest at certain price points, that will often tell you exactly where the big boys and girls are hunting.
Forget about “support and resistance” as those are widely taught, highly computerized and almost totally outmoded concepts at this point (which is why professional traders hope you still use those things even though they think in terms of “levels” and tactics).
Not for nothing, but the computerization that has been touted as an innovation works against you in this instance. Not for you.
And third, take away Wall Street’s advantage by using simple, effective tactics that put the odds in your favor, not theirs.
The markets have a very profound upside bias over time as do the great companies we talk about frequently. So play to that rather than worrying about risks you can’t control.
Tactics like Dollar Cost Averaging or its lesser-known cousin Value Cost Averaging can go a long way towards boosting your returns, lowering your risk and keeping your money on track.
But Wall Street hopes you’ll never figure that out because they know keeping you off balance and focused on the minutia makes you more emotional and likely to trade more frequently, both of which make you easier to separate from your money.
Don’t play their game.
Play YOURS!
The reason most investors get skunked over time is because they lack the longer-term perspective and a proven framework to see past the short-term bull feathers. Especially in situations like this one.
Source: One Bar Ahead, All rights reserved, Keith Fitz-Gerald Research
Speaking of which...
They're already at it again today.
Quite a few analysts this morning are prattling on about how “the comps are getting harder” because Nvidia’s growth is so high. Or that the company’s guidance isn’t as high as expected because it’s “slowing.” 🤦♂️
The clickbait artists are in high gear too, noting that Nvidia faces a show me moment and sagely wagging their finger as they look down their collective noses admonishing that future growth is harder to justify. 🤦♂️
Gimme a break!
This is the exact same nonsense – and in many cases similar headlines - they’ve been spouting since October 2022 when the stock dropped to near $100 (presplit) and I jumped in with both feet telling incredulous anchors national television and you right here that Nvidia would go to $1,000, then split. Both of which came to pass.
To be clear, I’m not telling you this to brag because that’s not my style. I could easily have been wrong.
The point I made then, and which is still true today, is this.
AI may be the single most important investing opportunity in recorded human history.
- Nvidia reported July quarter revenue jumped to $30B+, up 122% YoY. (Read)
- Guidance reflects an 80% YoY increase
- Gross margins will be in the mid-70% range for the full year
- Management announced a $50B stock buyback
- Expects to ship several billion dollars in Blackwell AI chips during Q4 alone
Shares have returned 151.57% over the past 12 months and an astounding 2,898.35% over the past 5 years as I type. The SPX has returned 26.77% and 94.61% by comparison.
Play to win, or you won’t... win.
Bottom Line
There are 10-15 “Nvidias” out there in various stages of maturity right now.
Your job as an investor is to find ‘em then get your money across the starting line as soon as possible.
If you’ve got this covered, cool beans. If not or you find what I’ve shared with you today helpful, I’ll be here along with a short list of stocks I think make the cut.
As always, let’s MAKE it a great day!
You got this – I promise.
Keith 😊
