End Vidia?
“Are you coming or going?
Both.” ?
—The Terminal
The clock has started ticking as of...now.
Key takeaway: See Markets section for most likely path to the S&P high as Pave’s models flash their first warning sign regarding high valuation. The problem with exponential expectations is they need to be beaten by ever-increasing amounts. Favorable inflation data keeps a 50-basis point cut alive if JOLTS ADP and Nonfarm Payrolls are weak. Noting an unstable reversal in stock vs. bond returns and a change in the crude oil dynamic.
Geometry Dept: Investors extrapolate trends linearly, ignoring the business cycle. However, when linear forecasts accelerate to pricing in exponential revenue growth, an eventual reversal becomes a certainty. Have we seen this topping dynamic begin with Nvidia? Other questions arise, such as whether management’s decision to buy back $60 billion shares trading around 25x revenue is a prudent use of company resources? ??
Undoubtedly, Nvidia has navigated storms, including China restrictions, data center supply and power availability, along with product delays. One problem the company has yet to face is when their biggest customers discuss slowing their AI spending. Future revenue growth is the pillar holding up Nvidia’s stock price, and seemingly insatiable customer demand is the driver. NVDA relative to the S&P Index resembles what Cisco experienced at the top of the tech bubble. The following chart is CSCO relative to the S&P500 in red from early 1999 into the March 2000 highs, with the current data on NVDA/ SPX overlaid in black.
Nvidia’s stock price peaked 3 months ago along with its relative strength to the S&P 500 Index, a full month before the S&P 500 Index high.
Coincidentally, our models are now showing an improvement in the importance of the valuation factor. You may recall that Pave’s models had recently shown a high factor beta for working capital and liquidity ratios, meaning investors have begun to focus on companies that can survive a revenue downturn. Now, the models are showing that capital is flowing out of overvalued stocks. At best, this is a setup for a rotation into stocks exhibiting high quality growth at a reasonable price, and at worst, a major market top.
If my 2007 analog is going to continue working, it would expect NVDA hitting 144 this month before a turn, coinciding with new all-time highs on the indices.
Update: Retail vs. Insiders
August NVDA retail flows hit a record $6 billion, with levered NVDA ETF purchases also registering monthly highs. Meanwhile, Kirt Corregan sees that across all stocks, the 5-day insider sell/buy ratio moved up to a bearish 2.8x, and he points out that the 30-day sell/buy ratio could cross into ?bearish territory as early as next week. Insiders are restricted from reversing their sales for 6 months, so they are confident that they will be able to buy back those shares at lower prices in March 2025. Again, when insiders are retreating as retail rushes in to the high fliers, get ready to run.
PCE: Under the Surface
I always rely on the Dallas Fed’s Trimmed Mean PCE inflation rate, not just because it renders a more stable reading over time, but for how it distills the components of the inflation index. For the same reasons, Federal Open Market Committee (FOMC) members analyze this chart as soon as it is published. The chart below shows six categories of inflation, all color coded, weighted by their share of total spending each month.
The horizontal red line shows that 22% of all total spending was in categories that had an annual inflation rate of 5-10% (blue) and above 10% (green). As a rule of thumb, the FOMC wants the percentage of high inflationary components to be sustainably below 30%, and this is the first time in a while with two consecutive readings below 30%. This is significant, because it could push FOMC voters looking for more evidence before cutting rates to now feel confident in doing so.
The red vertical arrow in the white section represents the percentage of deflationary items (negative inflation rate) in this month’s PCE calculation. One third of all items that were consumed in the PCE basket now exhibit falling annual prices. Adding in the purple segment (0-2% inflation), roughly half of all goods and services that are being consumed are below the Fed’s 2% inflation target.
Another Data Series the FOMC Will Consider
The Atlanta Fed’s Wage Growth Tracker is also welcome news for FOMC voters. Most use the hourly wage index, but I prefer, and have pictured, the weekly wages data below because it incorporates hours worked as well. The latest July data has fallen to 4.6% annual wage growth, below the 4.8% January and March lows, and the lowest since 2021.
Considering the backdrop of these two inflation metrics shown above, if the payroll number is soft, it would open the potential for a 50-basis point cut this month.
Japan FX Update: Seasonals
The dollar Index seasonal over the last 20 years below illustrates the typical pattern of strength into July, a pullback into early August, which sets up the strongest rally of the year into Thanksgiving (see yellow highlight).
Aside from the USDJPY rally in April, the pattern this year for USDJPY into the early August lows has been roughly similar to the seasonal chart above: ?
The expected upcoming seasonal pattern reduces fears over future USDJPY lows. However, the way I interpret seasonals is that I note the divergences from that seasonal pattern, especially if the seasonal had been working up to that time. For example, August normally experiences a good rally off lows early in the month. That rally started, but then diverged by retesting the lows. Given the seasonal tendency for mid-September dollar weakness, I am on the lookout for potential new lows in USDJPY after U.S. Nonfarm Payrolls on the 6th, CPI on the 11th, and of course the Fed rate decision on the 18th.
New USDJPY lows, if they occur, should renew the downward pressure on U.S. equity markets. If new lows in the currency pair do not affect stocks negatively, that could mean that a good portion of the Yen carry trade was reversed into early August.
Turning to inflation, Japan’s 2.4% CPI for August continues the rising trend, albeit quietly, which will keep the Bank of Japan on alert.
USDJPY will react quickly after the Nonfarm Payroll report, because the market is already expecting a divergent monetary policy stance between the FOMC’s September 18 statement and the Bank of Japan’s Monetary Policy statement on September 20. The timing and degree of divergence could be repriced after Friday’s employment number.
Markets:
Equity Market: Gap and go?
Weekly Trend: Bullish
I brought up the following chart last week: the intraday S&P 500 ETF SPY. As can be seen below, the gap still remains after four separate attempts to fill it failed (see arrows):
The S&P 500 equivalent resistance level is 5660 with the index closing Friday at 5650. The risk/return is about as clean as it gets:
What I wrote last week came to fruition with the low last week hitting 5560 exactly: “I would allow for a drop to 5560 next week that recovers 5570 quickly as a bullish possibility.” I also wrote: “The SPY chart does present problems; three attempts to fill the gap just below the all-time highs were rejected. The gap must be fully filled before I can buy into the 2007 analogy.”
The daily chart also has clear support at 5560
Assuming we make new all-time highs, the odds increase of a major top forming. That would be confirmed by a breakdown below 5560. The failure this week could come from a truncated new high at 5690, but likely it will be from higher levels.
OK, Here is my view for the final pattern
Assuming we break above 5660, we should hit 5750-5780 and then sell off. If we drop in three waves back toward 5660, then the possibility exists to reach as high as 5850 plus or minus 30 points. At that time, we may have reached a major top. From that point onward, action should be taken on?any of my daily sell signals. A close below 5660 would be the first confirmation, followed by a close below 5560 in the S&P 500. Every day the market rises in September, long-term investors should be preparing for a defensive posture.
Shanghai Failed Breakdown
The daily chart of the Shanghai Property Index over last year hit a new low Thursday but rebounded Friday. If the support level shown below holds, the failed breakdown can kick off a rally. That would be a sign of optimism that China’s housing market concerns have hit a climax and there could be a consensus for further fiscal support for the property market.
China data released this weekend show Construction PMI has moved to a new low, so further weakness in the Shanghai Property Index tonight and next week would be quite negative.
Right tail extreme for stocks vs. bonds reversal
One of CNN’s Fear and Greed Index indicators, the difference in one month stock returns less bond returns, just had a massive reversal, from -10% to +10% in a matter of weeks:
This type of snapback between major asset classes is a sign of instability.
Fixed Income: What’s a basis point among friends?
Weekly Trend: Neutral
This week has JOLTS, ADP, Initial Claims, and Nonfarm Payrolls data, so price action in Treasuries will be volatile. I had written last week “A 10-year yield close Friday above 3.85% is necessary to turn the trend down in fixed income.” That has happened. The weekly 10-year yield chart below closed just under trend channel resistance but gave a momentum buy signal (sell signal for fixed income). See the arrows for other signals.
For more confirmation, I would like to see my trend model reverse to positive (blue bar) and then close above 4.15% resistance.
The 2-year/10-year Treasury yield curve closed the week just one basis point shy of flat. The monthly chart below shows that the curve steepening tends to accelerate above +25 basis points (see the top of the red band).
The oscillator at the bottom is at similar levels to the 2000 and 2007 equity market peaks.
Crude Oil: Enter OPEC+,? Sell Side concerns
Weekly Trend: Bearish
OPEC+ had extended their voluntary production cuts at their June meeting through September 2025. They set a monthly tapering schedule for reduced cuts to begin October 2024. Expectations began to arise that OPEC+ would postpone the tapering and keep the production cuts because crude has not rallied since June. Importantly, WTI crude still sits below Saudi’s $80 breakeven level, and because U.S, Guyana and Brazil are all increasing production, it added to the view that OPEC+ would delay the tapering and continue to contract supply.
However, it appears they are going to stay on schedule, which will add to the global supply at a time when forecasts point to supply overwhelming demand next year. This is problematic, because prices are depressed despite the EIA’s forecast that oil market supply will fall short of demand this year.
Last week, prices could not move above $77.50 support, as shown by the following chart, even with headlines dominated by the Libyan shutdown. While $71.25 support continues to hold, the trend model is still on a sell signal (see red bars):
The consolidation pattern is still intact, but just barely. Prices did not respond to the month-end bullish seasonals. Lowered forecasts from the sell side pushed sentiment down with it.
We are on the lookout for loading schedules and big producers’ selling price stats in the coming weeks. That could give better insight into OPEC+ positioning into year end. Regarding seasonals, the market generally tops in early July, consolidates into mid-September, then pops for one month. That short rally is followed by a strong selloff from mid-October through mid-December.
Best,
Peter Corey
Pave Pro Team
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