Everyone wants to be popular.
We all want the respect of our peers. We crave the adoration of friends and family. It’s a natural human condition to desire popularity.
But in the financial markets, popularity is a curse. It’s the popular trades that blow up. They suck us in and get us thinking about how cool it is to be in this trade or that trade. Then, at just about the precise point where everyone loves the trade, the market blows it up.
Because the market hates popularity.
Indeed, if we were in high school, the market would be the one shooting spitballs at the homecoming queen. And, right now, that queen is NVIDIA (NVDA).
It seems everyone loves NVDA. And why not? It has had a spectacular run. It’s up 300% over the past year. It’s riding the artificial intelligence craze. And all sorts of market pundits believe NVDA could soon overtake Apple (AAPL) as the biggest stock in the market.
The Popular Kid
Who wouldn’t want to hang out with the most popular kid on the street?
But, before we offer up all of our lunch money to become part of the “in” crowd, let’s take a look at this chart…
This is a five-year chart of NVDA plotted against its 200-day moving average (DMA) line (the blue line). The 200-DMA serves as a magnet for NVDA. Anytime the stock drifts too far above or below the line, the magnet pulls it back in.
The red, vertical lines on the chart highlight times when NVDA was trading historically far above its 200-DMA when NVDA was popular. On two of those occasions – in early 2020 and late 2021 – the market dealt with that popularity by crushing NVDA by more than 30% in a couple of months. On the other two times, NVDA chopped around, going nowhere, for several months, giving the 200-DMA a chance to catch up to the stock price.
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Don’t Get Hit With a Spitball
It’s worth noting that the best time in the past two years to buy NVDA was in October of 2022 when the stock was trading historically far below its 200-DMA. The stock was horribly unpopular. It was the nerdy, pimply-faced teenager nobody wanted to hang out with.
Today, NVDA is trading 75% above its 200-DMA. The momentum indicators at the bottom of the chart are more overbought than at any other time over the past five years. NVDA is the popular trade. Everybody is talking about it. Everybody wants a piece of it.
Be careful. While it’s nice to hang out with the popular kids, it’s best to stay out of the way when the spitballs start flying.
NVDA needs some time to consolidate the recent monster move. The best case is that the stock could hang out at current levels for a while and give the 200-DMA a chance to rise up closer to the current price. The worst case is that NVDA could be headed for a nasty correction.
Either way, traders who are looking to buy NVDA will likely get a safer entry level a few months from now.
Best regards & good trading,
Jeff Clark
Editor, Market Minute