Nvidia surged to a new all-time high last Thursday, reaching as high as $140 per share on the opening, or nearly $3.5 trillion market cap. Nvidia tripled in the last 12 months, but the ride has been volatile. Nvidia is expected to remain strong since its weighting will be boosted in the Select Technology SPDR ETF (XLK) to 21%, up from 6% on June 14th. The primary casualty is Apple, whose weight is expected to be reduced from 22% to only 4.5%. Last week was odd since most holiday-shortened weeks are closed on Mondays, but Juneteenth fell on a Wednesday. As a result, light trading volume characterized most days last week, but options expiration day on Friday got pretty wild, with the option “tail” wagging the dog on stocks with heavy call option trading. This Friday, the annual Russell realignment will be finalized, so many stocks added to the Russell indices may “pop” on Monday. Meanwhile, the cyberattack on CDK, which supplies software to car dealers, energized cyber security stocks like CrowdStrike (CRWD) and Alarum Technologies (ALAR). ALAR was a good near-term buy after it sold off on Tuesday on an announcement that its short interest declined to 4.7% of its outstanding shares. The benchmark 10-year Treasury rate sank to near 4.2% on Friday which underlines my long-time belief that bond traders (or “vigilantes”) determine interest rates more than the Fed.
Here are the most important market news items and what this news means:
- Energy prices remain high in the summer months but should moderate after Labor Day. There remains a probability that Russia’s Arctic pipeline may be hit by Ukraine since they have hit six Russian refineries and/or crude oil storage facilities, despite the Biden Administrations instructions to not strike at Russian energy infrastructure.
- In the U.S., we remain blessed to be food and energy independent. The only glitches on the energy front remain the Biden Administration’s orders to curtail LNG expansion and require “carbon capture” in all new power plants. Since a “carbon capture” permit is about an 8-year process, the Biden Administration effectively put the kibosh on expanding the utility grid with natural gas power plants. As a result, blackouts are more possible this summer during heatwaves.
- In the wake of the European parliamentary elections, there is a shift to right-wing parties that (1) oppose many “green” agricultural reforms, (2) excessive immigration, and (3) increasingly question aid to Ukraine, so the European Union (EU) is starting to “crack.” The upcoming French elections will be consequential since the conservative movement in France is essentially an anti-EU movement.
- The U.S. Presidential election will also be crucial, and the Thursday Presidential debate may signal that a change may be forthcoming in November. In the meantime, both Biden and Trump are increasingly promising everything and anything to try to boost their support.
- All the election uncertainty in Europe and the U.S. will be over in the upcoming months. Due to all the promises, investor confidence typically increases during major elections, so if history repeats, the stock market should continue to meander higher, especially if central banks continue to cut key interest rates to stimulate economic growth. In the U.S., weak retail sales have clearly signaled that consumers are struggling, and unemployment is now rising, so I expect that the Fed will cut key interest rates no later than September 18th.
- The brief, but sharp pullback in Nvidia and Super Micro Computer that ended with Tuesday’s reversal, is a reminder that Citadel’s “mean revision” trading algorithms remain alive a well. Essentially, the stock market has about 8 months of mean revision trading, which tends to dissipate when earnings announcements commence in mid-July. Although I sincerely believe that any dip in Nvidia and Super Micro Computer are great buying opportunities, please be aware that Citadel’s mean revision trading algorithms may remain active until the second quarter earnings announcement season commences.
- My Buy List remains well-positioned for the AI feeding frenzy, which shows no signs of stopping. Growth stocks helping to expand the electric grid and fuel AI data center growth include Eaton (ETN), Emcor Group (EME), Quanta Services (PWR), SuperMicro Computer (SMCI) and Vertiv Holdings (VRT). The companies helping to protect the electric grid and data centers include Crowdstrike (CRWD), Nutanix (NTNX) and Parsons Corporation (PSN). As much as I love Nvidia, I hope you own all these stocks expanding and protecting the utility grid and data centers.
- Other stocks characterized by strong sales and earnings include Eli Lilly (LLY) and Novo-Nordisk (NOVO) which are prospering from the booming business of weight loss drugs. Allstate (ALL) and Progressive (PGR) are benefitting from high insurance rates. Energy stocks are benefitting from recent heatwaves, strong demand, and persistent uncertainty surrounding conflicts in the Middle East and Ukraine.
In summary, our best defense remains a strong offense of fundamentally superior stocks. The second-quarter earnings should be up at least 8% for the S&P 500. I should add that the second quarter represents the last quarter of easy year-over-year comparisons. This is why it is imperative that the Fed cuts key interest rates in the upcoming months to “turbo charge” U.S. economic growth now that retail sales have stalled and the manufacturing sector has been sputtering for over 20 months. All good stock markets climb a “wall of worry” and the current stock market is no different.
