For all the negative headlines the market has been surprisingly resilient. We saw a little red last Friday, but it was an options expiration day so I take it with a grain of salt. Given our run during the week and the overall disappointing retail sales earnings results, a little profit-taking isn't too surprising.
We've still got around a month before the dog days of summer truly hit the markets. A debt ceiling resolution could provide bulls with the fuel needed to tack on another 5% to 6% upside in equities. However, we must be prepared for a sell-the-news reaction.
I'd argue the debt ceiling and market moves before a default or resolution will be inversely correlated. The higher we push before a resolution, the higher the likelihood I believe we experience a sell-the-news reaction. The lower we move on a default or lack of a resolution, the quicker we'll bounce on an agreement.
Following the trend, especially on tech, and implementing trailing stops continues to be the most prudent strategy. Have names such as Nvidia (NVDA) and Advanced Micro Devices (AMD) gone off the rails lately? Nvidia is up more than 118% year to date, so it might be fair to say the stock's performance has priced in everything that can go right and more before this week's earnings report, but so what?
Do you really want to step in front of the 20-ton train and stop it with your body? It's suicide.
Large-cap names trading above their 5-day, 10-day, 21-day and every other exponential moving average (EMA) don't tend to make great shorts from a reward versus risk approach. Eventually, they will find a top or retrace, but markets can stay irrational longer than we can remain liquid.
And Nvidia is enjoying the momentum from the artificial intelligence chatter and developments, much like it did with cryptocurrency mining. With so little to choose from regarding AI investing in the public markets, names such as Nvidia will continue to get mentions and allocations from those looking for exposure to the space. You can bet NVDA management will use the term AI dozens of times this week when discussing the company's recent financial results.
The entire tech rally has been compressed into AI and semiconductors. Can AI prevent a recession? I see that question, and while I believe AI will increase efficiencies for many businesses, the learning curve will be steep. Implementation will take time. Those efficiencies are not going to appear instantly, and certainly not fast enough to prevent a recession or fight off inflation. It's a nice dream, but nothing more than a dream.
AI should positively impact companies and economies for the next decade or more, but for us to believe much of that impact will be felt in the next six to 10 months is simply unrealistic. Play the trend, but don't get caught in the hopium that AI will fix everything in 2023.