I admit – I’m not wholly impressed by the latest revelations of AI, including language models like ChatGPT. That might be because I’ve known AI models for a while, and there has not really been any quantum leaps recently, other than publicity. Just look at this lawyer being sanctioned over generative AI flat out inventing legal precedent cases. There’s clearly a long way to go.
On the other hand, I don’t want to bash AI – it does work to some degree, and will undoubtedly get exponentially better in the future. The crux is, AI is just not really anything new – in fact it’s been around for decades. The only thing new about it is its publicity, recently exploding into the eyes of the everyday citizen through the release of tools like ChatGPT.
Markets work on institutional money – the big money makes or breaks trends and markets. With their floors and buildings full of research staff, they’ve known about the potential of AI for years and decades, and have long acted (i.e. speculated) on this knowledge in the stock market.
When a stock rally thus seemingly blossoms on information that in reality is very old, the rally is destined to be weak, only driven by small amateur money or less-than-witty professionals. Those rallies tend to be heavily volatile (the enemy of risk management) and fizzle out sooner than later, but of course that is a relative statement – they can go on longer than one would think, as is the case right now. However, they certainly can’t herald the advent of a new bull market in equities.
The stock market has been in a bear- and sideways market since November 2021, but while a lot of money has been lost, the sentiment of both reckless amateurs and those that crowned themselves professionals during the 2020 stay-home & Fed-liquidity tech bull market has not been lost. In fact, bullish complacency has never washed out, as is commonly as major ingredient of moderating bear markets. Newsletter writers as a group consistently spread bull propaganda, index options premiums stayed subdued throughout, and the dumb money continued to shovel cash into past leaders from the covid tech frenzy.
Meanwhile, the latest rally from October has brought the NASDAQ Composite up >30%, while every single breadth measure continued to decline miserably. In fact, breadth has been this worse the last time in late 1999.
Why has the NASDAQ, specifically the Nasdaq-100 rallied to such a degree despite a complete and utter lack of true leadership in growth stocks? Why, because the Big Tech stocks had already become a safe haven after the chain of bank insolvencies, which is now followed by them becoming the more legitimate poster boys to bet on AI.
But the ice is thin. In fact, there are only about 9 mega-cap tech stocks driving this move, which however account for almost 60% of the Nasdaq-100 price movement. Such a narrow melt-up of a few obvious and crowded tech stocks while the rest of the market is heading sideways or even down (e.g. micro- and small-caps) is indeed eerily reminiscent of the 2000 top.
Old and over-crowded horses like MSFT, GOOGL, AAPL, META, and lately especially NVDA and AVGO rally on people’s speculation that AI will now make those companies richer than god. Well, the same happened with any companies even so much as whispering the words ‘internet’ and ‘.com’ near the 2000 top.
The problem was put aptly by the eminent Bob Farrell, “markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.” It doesn’t get more blue-chip than the names mentioned above.
To boot, there were numerous trading sessions into the advancing SPX over the last 5 weeks or so that actually resembled heavy selling.
The last few days of rally were indeed driven by rotation into the ultimate FOMO stocks of NVDA, AVGO and MSFT, after NVDA’s leather-jacketed Jensen Huang “ratified” the profitability of AI at their latest earnings release and shareholder publicity stunt, says Jeremy Siegel, one of the talking heads on CNBC.
Well, a bubble is only a bubble if the figureheads of the day and the majority of speculators vehemently propagate that there is none. We’ve witnessed something as idiotic as meme stock rallies just two years back – anything goes by now.
For a stock like Broadcom (AVGO) to pop 50% in 3 weeks, something has seriously come loose. Remember that AVGO was founded in the 1960s – this stock has been played over by the smart money a long time ago. There’s nobody but the village idiots driving this up, whether they’re “professionals”, or not. A similar chart was visible in late 2000, just before the long sleigh ride to a 95% loss of its share price began.
Of course, not only NVDA rallied on the biker presentation, but pretty much any stock of a company of which the CEO’s twice-removed cousin has recently mumbled the words “AI” in their sleep (e.g. PLTR, UPST, SSTK, AI, NNOX, IONQ, SOUN and many other low-quality stocks).
As I said before – amateur FOMO rallies can go longer than any contrarian can stay liquid, so I won’t go in shorting anything – this might stop this week, or we might see new all-time Highs on NASDAQ in a couple of months. But I definitively won’t pile into this polished turd of a market either – because there is no opportunity in real worthwhile stocks. Being on the same side with the amateur crowd rarely pays off, and the hot air has to swoosh out of the balloon sooner than later.
