An Early Rug Pull

They tried this morning, they really did.  There were a few attempts at rallies in the pre-market, but those eventually succumbed to a lack of follow-through.  There was some mild enthusiasm after a better-than-expected headline PPI reading, but that faded when traders realized that any improvement was offset by upward revisions to last month’s figures.  More importantly, a nascent bounce in hard-hit Nvidia (NVDA) reversed course, and that led to a broader bout of selling in tech stocks.  As of now, indexes are off their lows, but meandering at lower levels.

As noted, the Producer Price Index report for October was indeed encouraging at first glance.  Both the headline and core readings rose by 0.3% for the month, and while the core matched economists’ consensus, the headline was 0.1% below the 0.4% expectation.  Unfortunately, both were revised higher by 0.1% for the prior month.  That brought the headline to 1.4%, from a previously reported 1.3%, and the core rose to 0.4% from 0.3%.  That negated the positive surprise for the headline and made the core slightly worse than expected.  Bonds tried to rally, then reverted to small losses (higher yields) before finding a flight-to-safety bid when stocks sank.

About that reversal in stocks: it is important to remember that this has actually been a pretty good week for major indices despite some important negative events.  Investors and traders clearly want this market to run higher or at least are afraid of missing an upward move. 

For perspective, as I type this around 11:30 ET, 2- and 10-year yields are up by 34 and 28 basis points for the week, respectively.  That is a stunning move, brought on by Tuesday’s hotter-than-expected CPI report that spurred increasing expectations for rate hikes.  Over that same period, the S&P 500 (SPX) and Nasdaq 100 (NDX) are up by 2% and 2.7%, respectively.  We can debate whether bond or stock investors will prove correct over the long term, but today’s drop notwithstanding, this has been generally a good week for stockholders. 

There is of course one glaring exception.  NVDA is down by more than 14% so far this week, and down more than 30% since the start of the third quarter.  That said, if I had told you last week that major indices would advance even as the second-largest US stock – the linchpin of the AI industry – got clobbered amid a drumbeat of seemingly unrelenting bad news, would you have believed me?  I doubt I would have believed myself.  

Until this morning, the prevailing thought process has been, “if NVDA is out of the way, who wins?”  Those winners include key semiconductor competitors like Advanced Micro Devices (AMD) and Broadcom (AVGO), and hyperscalers like Amazon (AMZN), Alphabet (GOOGL, GOOG), Microsoft (MSFT), and SpaceX (SPCX).  If you need some extra evidence of that thesis, note that MSFT is slightly higher since its massive outage yesterday afternoon.  (Gotta say, despite the inconvenience, I didn’t mind the respite from emails for a while.)

Among those seeking opportunities is the multitude of NVDA dip-buyers, unfortunately.  Although I have only very limited visibility into our customer activity, I have never seen anything close to the flow of net buy orders on our platform that I saw this week – and that flow increased steadily as the week progressed.  While we will never advocate against aggressive traders seeking opportunities in oversold financial assets, we noted a key consideration for traders earlier this month in the wake of poor earnings reports from GOOGL and Intel (INTC):

If the news is legitimately bad, be patient.  A stock that is getting hit because of a legitimate shortfall in a key valuation metric will take some time to recover. 

Remember, traders react while investors consider.  Institutional investors are likely to reallocate major positions over the course of several days as their internal analysts and portfolio managers reevaluate their models, particularly if they are already fully- or overweighted against their benchmarks.  It will likely take time to build a bottom.  Aggressive traders might see an opportunity to buy an oversold stock, but those conditions can and often do persist for days or even weeks.

Regarding NVDA, we are certainly dealing with a key fundamental event that outweighs even an earnings shortfall.  I know of no other way to characterize an unexpected ousting of its CEO amid swirling concerns about export violations and espionage.  It is clear that institutional investors are reassessing their opinions about that company and its prospects; thus it is dragging on the stock price for longer than many traders initially hoped.

Still, the stock market’s mentality right now is not about assessing risks, it’s about seeking opportunities.  If growth stocks are down, let’s look at value stocks.  If high-beta stocks are declining, let’s move into low-beta stocks.  When the opposite occurs, the reverse applies.  And so goes the market rotation.  Befitting that theme today, even with SPX trading about 1% lower, we have five of its 11 sectors trading higher.  All are defensive: consumer staples, financials, utilities, energy, and health care.  If Mr. Market can find a narrative that fits his desired outcome, he will.  But that can’t be relied upon every day in all circumstances.  Today is one of those days.