Bears were pounded on Friday as more money flowed into artificial intelligence stocks, states Jon Markman, editor of Strategic Advantage.
The Nasdaq 100 ended at 18,303, up 1.4%. The NDX added 2% for the week, the second consecutive gain, and the seventh winning week during the past two months.
Bears are on a losing streak that shows no sign of abatement. The bears are still getting the AI story desperately wrong. They see the rally through the lens of a tech bubble. Too many bears are shorting shares of companies at the vanguard of the AI buildout, a transition still in the early stages.
Jamie Cox, managing partner at Harris Financial Group likened the runup in AI stocks to a late 1990s redux, an emphasis on what might be. This assessment is factually wrong. The current tech rally is concentrated on what is happening on the ground, the fantastic spending across all of big technology. Executives at Nvidia (NVDA) said in February that sales of AI hardware to data center customers surged to $18 billion in the fourth quarter of 2023, an increase of 400% year-over-year.
Overall revenues in Q1 2024 are expected to reach $24 billion. More importantly, these sales are coming from Meta Platforms (META), Microsoft (MSFT), Alphabet (GOOGL), Amazon Web Services, Oracle Corp. (ORCL), and other data center hyperscalers. These firms have deep pockets and talented management teams. They are methodically retooling their cloud computing platforms, moving from general-purpose computing to AI. This isn’t small investors sinking their mortgage money into Pets.com. It is executives at historically successful tech companies planning for the future.
Yes, it is reasonable to expect pullbacks in AI stock prices, however, betting against the larger trajectory of investment, or the suggestion that AI is a bubble like 1999, is financial malpractice. This fallacy is also adding fuel to the rally. Bearish pros who are short are being skewered. Other pros who have been underweighting these stocks are being forced to buy in at higher prices merely to maintain contact with their unmanaged benchmarks.
After the close on Friday, Dow Jones, the firm that controls the S&P 500, announced that on March 18 the AI-focused Super Micro Computers (SMCI) is being added to the benchmark.
The NDX closed Friday above the key resistance point at 18,259. That level is now nominal support, although bulls will find more solid footing at 17,790, the rising 20-day moving average. I expect bulls to keep pounding away at defenseless bears. The next resistance point is 18,849, about 3% higher.
Concentrated Wins: The Giants of Portfolio Growth
The elite analysts at one of our favorite boutique research firms—DataTrek in New York—released some data that highlight two of our biggest investment theses. Most stocks suck and the majority of the gains in the market come from a small minority of stocks.
Here is an excerpt from a report last week:
“Three stocks are responsible for half of the S&P 500’s YTD gains: Nvidia, Meta/Facebook, and Eli Lilly. This is not an anomaly, let alone a reason to be bearish. Rather, it is exactly how markets work.
“In the case of NVDA, it has added 2.2 percentage points to the S&P 500 YTD. META is responsible for 0.8 points. LLY has added 0.4 points to the index. Combined, that is 3.4 points of the S&P’s 6.1 percent advance YTD.
“NVDA, META, and LLY are widely followed stocks with stories we all understand at least at a basic level, so they are not the sorts of names where you would expect to see a dramatic revaluation in a short period. This tells us that the single biggest market stories YTD are cost and capital discipline (the reason META was up 20 percent on Q4 earnings), demand for generative AI hardware (NVDA), and break-through weight loss drugs (LLY).”
Two Takeaways: Leaders in the AI space will continue to grow as supply is not close to the demand. We can also see that to have our portfolios outpace the market average we have to own and hold onto these high-performing companies.
You will see us add a few more of these types of positions to our Digital Transformation portfolio over the next few weeks and months. This is not madness or a bubble. Quite the opposite.
Double Trouble: Our timing model is bullish. Members added the ProShares Ultra QQQ (QLD) on January 17 at $73.90.
The QLD position was stopped out on February 20 at $80.74, a gain of 9.3%.
Remove all open orders. The QLD reached the first target of $88.30. The current entry level for a new position is $86.20, with a final upside target of $93.20, however, pull orders for now. We will reset orders after the close on Monday.
