From the October 13th low, one of the best performing sectors has been semiconductors. This is a theme that we introduced in the I/O Fund Essentials video “Semiconductor Stocks Continue to Outperform Value” where we stated:
“With a rotation into value names underway, it would be easy to discard all of tech and move towards the sectors that are working. However, as we discussed last week, one specific tech sector is currently outperforming most value names – semiconductors.
This week, we provide a brief video taken from our weekly webinar where we offer a more macro context around why we like semiconductors going forward. Some markets appear to be closer to new highs than lows, and we believe that semiconductor stocks are signaling that they are ready to resume their leadership role going into 2023.
Reference our analysis last week “The Next Bull Market’s Leaders are Being Decided Now” for more information in addition to the video below.”
Since releasing this for our Essentials Members at the end of December, semiconductors have continued to shine. The chart below shows semis are the number one performing sector in tech.
Once of the leading stocks within this sector is Nvidia, a stock that has been a top holding in our portfolio since 2018. Notably, focusing on building Nvidia and closely managing this allocation is as relevant as ever.
We covered this last week in our February stock tip when we stated:
“Simply put, as Big Tech continues to build out hyperscale scale data centers and AI based technology, they will require specialized semiconductor chips – AI accelerator chips – to provide the necessary computing power required. At the moment, the AI chip market is a duopoly with Nvidia and AMD. However, Nvidia’s position is much larger than AMD and a “better” GPU. So as Big Tech continues these AI related investments, Nvidia is the first place Big Tech will go to buy them – namely Nvidia’s H100 GPU chip.”
Nvidia: Technical Analysis
Unlike most tech names, NVDA has a probable path to new highs. The long-term technical path from the 2018 low is listed below in blue, with my alternative path in red.
The market is stretched and setting up for a pullback. This is evident with NVDA’s momentum indicator below the chart. Every time internal momentum reached these heights, and pullback soon followed. As long as the coming pullback holds the $140-$138 region, then the blue path remains valid. This path has the 2022 bear market as a pullback in a larger uptrend, targeting $355+ in the coming months. If we do break below the $140-$138 region, then the odds of this path to new highs becomes diminished, and it opens the door to the $90 region.
The pressing question is how much farther can NVDA run in this bounce off the October lows? The $230 region is strong resistance. There is a confluence of key angles in this region.
If we do see a breakout above the $230 region, this is not a breakout we would buy. If we zoom in on the bounce off the October lows, it is quite clear that the structure of the uptrend is only 3 waves.
A three wave move (in either direction) tends to be symmetrical, and leads to large corrective moves. In terms of symmetrical, what I mean is that the length of the 2nd move higher tends to be the length of the first move higher.
So, if NVDA does see one more high into the $241 region, this would be the exact symmetrical move where most 3 wave bounces tend to end. When you factor in that each move higher is happening with less momentum, the risk is quite elevated above $241.
Conclusion:
We see the odds of NVDA retracing back to the $170-$150 region as a high probability. We will likely look to slowly layer in around these levels. However, NVDA holding the $140-$138 region will be crucial. If this region breaks, it will open the door to the $90 region. This would coincide with the macro environment beginning to drive equities once again. As long-term investors, our plan is to keep NVDA as a high allocation in our portfolio. Our goal is to further accumulate on the coming drawdown, and we will slowly layer into this stock at key levels.
We favor buying in small layers of 1% or 2% at key levels, which we described above. This mitigates our risk if we do reach the $90 region. For example, we bought at the Nvidia low in October at $108. No matter how high our conviction may be in a specific name, macro is the primary force on stocks right now, which is why adding in small layers is even more important in 2023 than in previous years, such as 2020-2021.
Knox Ridley holds a premium webinar every Thursday where he reviews key positions, including NVDA. We cover macro charts as well as various stocks to get a clear understanding of where the market may be going and how to position for it. Learn more about Advanced Market Signals here.Advanced Market Signals here.