Tech down, energy up

The selloff in Nvidia deepened yesterday and sent the shares into the correction territory following a 10% selloff. Nvidia shares erased around $430 bn in market cap over the past three sessions. The selloff hit suddenly, right after the company stole the status of the world’s most valuable company from Microsoft last week. There has been no bad news regarding the company’s fundamentals on the newswire, no analyst downgrades, no soft forecasts, no rumours of slowing sales. It’s just that the end of last quarter and the first half may have brought some investors to take some profit and go to the sidelines.

One question that everyone asks is, whether last week’s good news marked the finale of the Nvidia’s surge to the top, and if the past three-day selloff is the beginning of a sharper downside correction. I don’t have the answer to that question, the time will tell. Yes, there has certainly been strong speculation in Nvidia’s exponential surge since the beginning of last year. And yes, strong rallies were often followed by sharp selloffs. In this context, Nvidia probably has ways to correct before finding a more reasonable valuation.

From a technical perspective, the first support is seen near $110 a share, the minor 23.6% Fibonacci retracement on the AI rally that started at the beginning of last year with the launch of OpenAI’s ChatGTP. The 50-DMA, just above the $100 psychological support presently, could act as another support and finally, the major support to the AI rally is the $92 per share level, the major 38.2% Fibonacci retracement should, in theory, distinguish between the actual AI rally and a medium term bearish reversal.

The other question in minds is if the price pullback a good opportunity to strengthe long position at a better price before Nvidia announces its Q2 earnings, where it’s expected to reveal a monstruous $28bn sales, which is more than the double of money is made the same time last year.

In all cases, it’s too early to call the end of the Nvidia-mania, but given the high amount of speculation around the stock, we shall see the price action gets worse before it gets better.

Elsewhere, fortunes for Apple are improving as the company – who have lagged its peers in the AI rally – found an opportunity window to bring investors back on board and that opportunity window is offering the AI tools developed by others on their iPhones – with free partnerships – to see if people would buy the latest AI-boosted models. In this context, Apple announced that it would integrate Meta’s Llama 3 AI to its products, after it announced earlier that it would also offer OpenAI’s ChatGPT on iPhones. It’s a genius move, let’s see if it could make the AI rally change hands!

Energy smiles

Yesterday’s 6.68% plunge in Nvidia shares didn’t do good to mood in Nasdaq 100. The index dropped more than 1% whereas losses in the S&P500 remained limited to 0.31%, as the financials gained 0.63% while energy sector rallied 1.70% on the back of a rebound in crude oil to retest the $82pb level resistance, the major 61.8% level on the latest selloff. If this level is cleared, oil bulls will have a higher conviction on the sustainability of the rally and the gains could extend toward the $85pb level. The question is, do the soft economic data around the world justify a further rise in oil prices? Chinese growth is still not as strong as it should be, German business expectations unexpectedly declined for the first time in five months and the latest data from the US hinted at a faster-than-anticipated slowdown in the US economy. On the other hand, the central banks expectations aren’t easing enough to compensate for the slowing Western economies. So I’m wondering if we could see enough conviction above the $82pb level to carry this rally higher. And also, I’m wondering whether higher oil prices wouldn’t boost inflation expectations and jeopardize soft central bank expectations and limit the upside.

In the FX

The US dollar index eased yesterday, as the weekend euro bears scaled back their positions after the weekend. The EURUSD rebounded to near 1.0750. We could see the euro recover against the greenback in the first half of the year but I would expect the bears to come back in charge before the weekend, as the first round of the French legislative elections are due this weekend and political risks remain high as Marine Le Pen’s National Rally is seen getting more than a third of the votes. Elsewhere, the USDJPY trades a touch below the critical 160 level as the yen bears are testing the nerves of the Japanese officials to see what level will trigger an FX intervention. In Canada, the Loonie benefits from a rise in oil prices. Due today, data is expected to show a further slowdown in Canadian inflation and could fuel the expectation that the Bank of Canada (BoC) could continue pulling its rates lower. But we could see oil prices weigh heavier in the balance than rate cut expectations if crude prices break above a key resistance.