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NVIDIA (Nasdaq:NVDA) is now a Wall Street darling.
Incredible profits, incredible margins, and booming demand. Artificial intelligence is the future. But it seems that’s just for one stock. Yesterday was an interesting day for stocks. Nvidia shares closed up 9% while the rest of the market was crashing.
There’s an old saying in investing: “Generals can’t compete with their soldiers.” In other words, the narrower the market leadership, the more likely it is that the leadership will decline and collapse. If this were to happen, Nvidia’s stock price would theoretically plummet.
This is an issue I’ve always had with Nvidia. This isn’t a question of whether the company will perform as well as it wants to. This is a question of stock price movement and valuation relative to all the other stocks that aren’t participating.
Why outperformance of Nvidia stock is a bad sign
I was pretty wrong about Nvidia. But still, I Cisco (Nasdaq:Central Intelligence Agency) analogy is true. Several market indicators remain bearish. Small caps are still below their 2021 highs. Defensive sectors continue to outperform. Long-term Treasuries are showing signs of recovery. And we’re now in a situation where traders are only buying Nvidia and betting against everything else. Is this healthy?
This isn’t the market, this is Las Vegas, and everyone is betting on one stock, giving false confidence to investors who can’t see what’s going on beneath the surface.
A rising tide must float all boats or everyone drowns. Investors are taking on more risk now than they probably should, and they won’t worry about that risk until it’s too late.
I was wrong about Nvidia stock, but the reality is there can be no market for just Nvidia. Nvidia is a great company with great earnings and incredibly strong performance. But to really have confidence in the bull market, we need more stocks to get involved. Otherwise, the generals will be defeated by the soldiers, with or without AI.
As of the publication date of this article, Michael Gade does not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are solely those of the author, which is subject to InvestorPlace.com copyright. Publication Guidelines.
