Nvidia (NASDAQ:NVDA) is currently the darling of Wall Street.
Blowout earnings, incredible margins, strong demand. Artificial intelligence is the future. But apparently, only for one stock. Yesterday’s price action was fascinating. Nvidia stock closed 9% higher while the rest of the market collapsed.
There used to be this saying in investing that “the generals will fall to the soldiers.” In other words, the narrower market leadership gets, the more likely those leaders are to converge to the downside and collapse. If this plays out, Nvidia shares would theoretically plunge.
This has always been my issue with Nvidia. It’s not about the company, which can have stellar results all it wants. It’s about the stock price action and valuations RELATIVE to all other equities that are failing to participate.
Why the Outperformance of Nvidia Stock Is a Bad Sign
I’ve been very wrong on Nvidia. But I still think the Cisco (NASDAQ:CSCO) analogy is real. Several market indicators continue to look bearish. Small-cap stocks are STILL below their 2021 highs. Defensive sectors continue to outperform. Long-duration Treasurys are showing signs of life. And we are at a point now where traders are only buying Nvidia and betting against everything else. How is that healthy?
This isn’t a market – this is Las Vegas – and everyone is betting on one stock. And it’s causing a false sense of confidence in investors who are unable to see what’s been happening beneath the surface.
A rising tide must lift all boats. If it doesn’t, everyone drowns. Investors are currently taking on more risk than they probably should, and they will only care about that risk when it’s too late.
I’ve been wrong about Nvidia stock, but the reality is that we can’t have a market of just Nvidia. It’s a great company with great earnings and incredibly strong performance. However, for me to have real confidence in a bull market, I need to see more equities participating. If not, the general will fall to the soldiers, AI or not.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
