@theMarket: Nvidia Leads Markets to Record Highs

Stocks forged ahead this week, making new highs with technology stocks continuing to take the lead. Financial flows into equity buoyed the overall market despite some disappointing results in the U.S. government's Treasury auctions. 

 

Credit for the continued move higher must go to the number one AI stock in the world, Nvidia.

 

It was touch and go on Wednesday night as all eyes waited for Nvidia's earnings results. The Street was divided on which way the markets would go. It depended on whether this leading semiconductor company could beat estimates once again and deliver higher forward guidance on the world's demand for its artificial intelligence chips.

 

Both the Mag 7 and the AI 5 stocks spent the beginning of the week falling in fear that Nvidia results could not possibly top the results of the last two quarters. Strategists were warning that the entire market was at risk since the AI boom has been the main driver of the market's advance for more than a year. 

 

 The company's corporate earnings and sales not only fulfilled the hopes of the biggest bulls but super charged the price of every stock that was even remotely involved in the AI boom.   Nvidia hit a new high for the year on Thursday and Friday while triggering an almost 3 percent gain on the NASDAQ. The S&P 500 Index added close to 2 percent, although the Dow and the Russell 2000 small cap index did add far less.

 

And while stocks rallied, bonds did the opposite. The U.S. Treasury's 10-year bond yield has been climbing higher, reaching 4.319 percent. Bond buyers are insisting on higher returns, and they should, given the billions of dollars in bonds the Treasury is auctioning this quarter and next. In the recent past, this reaction in the fixed-income market would have put downward pressure on stocks, but not this week.

 

The need of the U.S. Treasury to sell more longer-dated bonds and fewer short-term notes is forcing the Fed into a quandary. While the Fed stands pat on raising interest rates any further, the Treasury auction sales are forcing yields higher anyway. If this continues, (and it will) at some point equity investors will start to pay attention. That would not be good news for the stock market. In an election year, this could spell trouble for the incumbent.

 

The Fed may be forced to somehow ease the situation, but how? They have already said that cutting Interest rates too soon might spark an upsurge in inflation. The obvious answer, therefore, would be to ease up on the pedal of quantitative tightening, which would inject more liquidity into the financial markets. That would be good for markets and presumably the President.  

 

But right now, momentum traders don't care about bond yields, the dollar, or even corporate earnings for the most part. As I explained to readers last week, we have entered a riskier period of the market that can deliver great gains and great losses in quick succession. The first half of the week saw stocks plummet in fear that one company's results would take the entire market down. Thursday and Friday delivered the opposite results.

 

The momentum in the U.S. stock market is beginning to catch on in global markets as well. Japan's benchmark Nikkei Index hit a record high this week beating the previous record set 34 years ago. Shares in Frankfurt, Paris, and Milan gained more than 1 percent while Europe's Stoxx 600 Index also hit an all-time high. Even China considered a basket case and the worst market around, has seen stocks gain over the last week or two.

 

This stock market rally is getting a bit long in the tooth. The last two rallies that occurred (between 2022 and 2023) lasted between 16 and 19 weeks, gaining 20 percent and 21 percent respectively. This present one is in its 17th week with a gain of 23 percent thus far. Could it run further?

 

Yes, technical charts say we can, even though we could see some short-term weakness ahead. It appears that financial flows into equity markets are still strong, so there is enough buying power available to fuel further upside. And so far, stocks have not fallen on good news, if this week is any indication. My first target remains 5,140 on the S&P 500 Index, and we are getting close to that level. A short-term pullback could be in the offing. 

 

But after that, a rally that extends into mid-March, or even April could see a few percentage points tacked on to this year's gains. Let's target 5,220 on the S&P 500 Index as a good guess.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.