Efficient Markets in Action

By TradeSmith Research Team

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LYFT gets a “typo”-driven boost… Why Japanese stocks are surging… A Magnificent regime change… The AI stock(s) that won’t stop… Will we look back on this as a bubble?

By Michael Salvatore, Editor, TradeSmith Daily

File this one under “you can’t make this up”…

Lyft CEO David Risher took to Bloomberg television on Wednesday to apologize — his words were “my bad” — for several company documents containing an extra zero on its earnings margin-expansion estimate.

While Lyft expects a very respectable 50-basis-point margin expansion on its earnings over the next year, company documents released after the close of trading Tuesday reflected a 500-point expansion.

To translate, that’s like if Lyft told investors its margins will grow 500% in the next year. As in, it’ll make a whole heaping lot more money.

The result was the kind of “beat and raise” rally we’ve been writing about here in TradeSmith Daily, but… let’s be generous and say the rally was misguided.

Investors (and their trading algorithms) bought first and asked questions later, with shares running as much as 67% higher in after-hours trading. We’re talking about billions of dollars here, generated out of a mistake.

And despite the mistake, LYFT shares managed to capture most of those gains anyway, as of Thursday.

One has to wonder if any Lyft insiders had an impulse to smash the sell button when this unfortunate-yet-happy accident occurred…

More than anything, this moment reflects the knee-jerk realities of financial markets driven by trading algorithms and firms thirsty for gains.

Before anyone — or any bot — stopped and thought if a 500-point expansion was realistic, the stock was off to the races. And, hey… yesterday’s price action shows us that traders like 50 points just as much as they like 500 points.

Efficient markets in action.

Worry not, for there are plenty more strange upside developments to talk about this week. Even ones that don’t immediately spring to your mind. Like what’s going in Japan…

❖ Japan’s stock market is beating the red-hot Nasdaq 100 in 2024…

And America’s retirement account, the S&P 500.

Check out the comparison of the Nikkei 225 with the two U.S. stock juggernauts below. It’s up over 16%, beating both by more than double.

What’s going on? Well, lots of things. But one of the biggest we can point to is the new shareholder-friendly reforms from the Tokyo Stock Exchange.

Last year, the exchange asked all its listed companies to make moves that will improve long-term returns, valuations, and profitability. How’s a company to do that? Attract investment. And one great way of attracting investment is issuing higher dividends and enacting share buyback programs.

So far that seems to be the main driver of capital into the Land of the Rising Sun. And part of why Japanese stocks are up more than 46% from the January 2023 lows.

Add a weak yen, which is helping to boost corporate profits and cheapen valuations…

And a refreshed investment incentive program for citizens, the Nippon Individual Savings Account, which now has higher investment limits and longer tax-exempt periods…

And you have a recipe for a huge boom in Japanese stocks that might finally take them to a new high — the first since the Japan bubble burst in 1989.

A good year for non-U.S. stocks in the cards? Who could’ve thought?

If you want in on this action, I’d suggest taking a look at the iShares MSCI Japan ETF (EWJ) — which holds a basket of Japanese stocks.

It hasn’t kept up with the Nikkei 225 proper — it’s only up 5.4% in 2024 — but is one of several credible plug-n-play solutions out there.

❖ Meanwhile, America’s Magnificent tech leaders are in a big reshuffle…

On Tuesday, the market cap of Nvidia (NVDA) leapt above that of Amazon (AMZN), making it the fifth-largest publicly traded company in the world.

Then on Wednesday, it shouldered out Google (GOOGL)… putting it in fourth place with a $1.8 trillion market cap.

What’s another $200 billion to beat out Saudi Aramco? At this rate, we’ll see it happen by the time you’re reading this.

Then all that’s left is another trillion to take out the current kings, Apple (AAPL) and Microsoft (MSFT).

Yes, the rush into NVDA has gotten just a little bit silly at this point. And while there’s no denying the momentum, there’s also no denying the laws of financial physics.

Shares of NVDA are currently in the longest stretch of overbought conditions… ever. It’s been above 70 on the relative strength index (RSI) indicator, the overbought threshold, for 26 trading days. That beats the previous record of 25 trading days back in 2021.

However, it’s worth noting the stock has been more overbought before… with the highest RSI reading ever pinned at nearly 92 from back in 2011 (see the blue dotted line below).

It hardly looks like it on this chart, but when NVDA exited overbought territory on the RSI back in June 2021, it fell more than 12%. If the same thing happened today, it would knock a cool $200 billion off its market cap… and send it down back below Amazon on the leaderboard (assuming Amazon stayed exactly where it is).

My point is, now doesn’t seem like a smart time to be buying NVDA shares.

But also, understand that a grossly overbought stock isn’t necessarily destined for the dumpster. Stocks can stay overbought longer than many traders can stay solvent. And what’s most likely to happen to NVDA is a healthy pullback.

That’s why I’d say wait on buying NVDA here, at least in the short term. Maybe I’ll wind up eating crow on that. But as someone with a 401(k) all-in on the S&P 500, I’m partially in for the ride just like you probably are.

❖ Speaking of A.I. stocks that won’t stop…

Super Micro Computer (SMCI) is making the NVDA chart look tame.

It’s at an almost obnoxious 96 level on its RSI… and the accompanying price line could sit next to the definition of “irrational exuberance” in the dictionary.

Two folks to shout out with regard to SMCI.

One is Jason Bodner, who’s now recommended two partial sells in his Quantum Edge Pro advisory at 149% and 258% gains. That’s enough for an initial $10,000 position to walk away with roughly $13,500 in profits… while still leaving a third of the initial position on the table as house money… in five months.

Just an outstanding return. (If you’re subscribed to Quantum Edge Pro, go here to check out the sell alert. And if you’re cashing out and happy about it, let us know at [email protected].)

Next is Lucas Downey — contributing editor of this fine newsletter, purveyor of excellent historical data studies, and always a joy to talk shop with — noted something important about the stock to me on Wednesday:

SMCI has now gone up nine days in a row — something that’s never happened since at least 2020. If history rhymes, we’ll see something like a 20% pullback — and soon.

It begs the question: what lunatic is buying at these prices?

The answer: Nobody who’s happy about it.

You see, a lot of the SMCI stock being bought right now is likely not by mom-and-pop investors. More likely, it’s by folks who are short, trying to catch the top… and failing miserably.

A whopping 10.6% of SMCI’s outstanding shares, about $2.6 billion worth, are sold short. As the stock surges, these shorts are getting blown up and forced to buy at higher and higher prices… in other words, a classic short squeeze.

Even more than NVDA, this is a stock you don’t want to be putting new money into right now. For those already in, I say congratulations… Oh, and maybe take Jason’s advice and reap some profits like right now.

❖ This all calls to mind… is A.I. another dot-com bubble?

It’s hard to deny that the price action in these hottest of hot A.I. stocks scoots right past the line of absurdity.

This is the stuff bubbles are made of. And if A.I. didn’t feel like a bubble last year, when it was basically the saving grace of the stock market, it definitely does now.

So is it a bubble? Maybe. Parts of it definitely are.

But the real questions are bigger, and some of them you can only ask yourself.

Will the technology have staying power on par with the internet? Seems likely. That means a bubble and even a painful bust today could set up decades of even bigger gains down the line.

Are you all in on A.I. stocks? If so, slap yourself on the back and take a few chips off the table. You’ve earned them. Stick them into places that look a little more stable.

Are you about to retire? If that’s the case, then what I said above goes double for you. Make sure you aren’t over-exposed to wildly volatile names and realize any huge gains currently staring you in the face.

Whatever comes next for A.I., whether it’s an ordinary pullback or something more fierce, I’m convinced the tech is here to stay.

Just like the internet, or bitcoin, or any number of other past bubbles, the ones that survive whatever reckoning is to come are likely to persist and keeping making money for those who stick around.

❖ It also doesn’t hurt to listen to the A.I. experts…

And for that, you should look to Luke Lango, editor of Early Stage Investor at our corporate partner InvestorPlace.

Luke has been all over the A.I. trend since before it hit the mainstream last year. Because of that, he’s one of a rare few who can claim monstrous gains in the space for his subscribers.

Last year, Luke recommended Symbotic (SYM), an automation company, for $16 a share. He eventually recommended selling it for $52.26, more than 226% higher than the entry price and even higher than it is today… just four months later.

He also caught a 96% win in C3.ai (AI) and a 73% win in GitLab (GTLB), all over the same time frame.

Lately, he’s been all over the story of A.G.I., which to me is the biggest reason to think A.I. tech has staying power.

This innovation — where an A.I. will be able to consistently perform tasks at a human level without constant input — could prove to be as disruptive as any past tech trend in human history, and probably much more. That’s why he’s recommending a new slew of A.I. stocks for new subscribers to take advantage.

Whether A.I. proves to be a bubble or not, you want someone like Luke Lango on your side. But the opportunity to join him on what he sees as another wave of A.I. gains is fast closing, with his recent presentation coming down next week.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily