The Nvidia Dump

Dec. 15, 2018 2:17 PM ETNVIDIA Corporation (NVDA)MU, NFLX81 Comments16 Likes
Arun Chopra CMT, CFA profile picture
Arun Chopra CMT, CFA
3.58K Followers

Summary

  • Nvidia drops 50%.
  • See why I shorted the name in the 230s.
  • See how Bitcoin, volume and momentum all diverged dramatically before the decline.
  • Looking for more? I update all of my investing ideas and strategies to members of Fusion Trading . Get started today »

Part 3 of the stock dump series starts here, with today's focus on Nvidia (NASDAQ:NVDA) (see part 1, The Micron Dump (MU) and part 2 The Netflix Dump (NFLX)).

Again, these articles are designed to help show a multidisciplinary approach to stock trading, investing, and position management. Let's jump right in.

It all started in June when the crypto market cracked and was down over 60%. There were numerous analysts at the time who tried to claim this would not impact the semi space. I took a different view, especially given what we were seeing with the broken trendline in the semiconductor index.

Readers of my work know I like to look for intra-market relationships vs. strict fundamental narratives. In Micron's case it was the auto index that was diverging dramatically, and in Netflix' case, the high-yield bond index was a bigger driver.

In Nvidia's case, it was clear to me that crypto and semis were much more linked than consensus believed.

July 30, 2018

I also took a look at Nvidia which showed numerous technical concerns in the summer. Note both the RSI and volume divergences on a weekly basis, particularly in the context of the two-year return.

But just because a weekly chart is diverging, that doesn't necessarily mean a trade is set up. It would take months, in fact all the way to October before a meaningful level to break setup.

Oct. 18

On Oct. 18 we finally got a setup that was actionable. This was a combo of the above weekly chart and then a defined level that would certainly cause trouble if broken.

Oct. 24

Four days later on Oct. 24, price not only had broken 233, but I made an important comment about how quickly momentum can unwind.

Oct. 29

Over the next five days price would continue to drop. Many claim the charts have nothing to do with this, and although to some extent I agree, it's the combination of valuation, momentum waning, prior returns, and then a defined level that leaves everyone running for the exits.

I know many will take issue with all the narratives I throw out in my tweets. I get that Seeking Alpha readers are focused on investing, and that any contrary information to their long run views is often challenged.

That's fair, but the path between an investment theme working and equity pricing can be extremely volatile. Further, with Nvidia, it was so expensive that anything was ready to knock it over. I've seen readers get frustrated as to what I ascribe to the decline, but risk is risk. All one has to know if when it's elevated, and if there's a trade setup.

Nov. 2

On Nov. 2, here's what Tesla's (TSLA) Elon Musk said in an interview with respect to autonomous vehicles. You can clearly see the micro issues vs the macro needs of the product.

On Nov. 13, Steve Wozniak echoed these concepts, and if anything took it a step further.

But stepping back to the valuation argument, at the time I commented that the valuation was still absurd.

Nov. 15

On the 15th, sure enough we saw not only a miss on the topline, but the company guided lower. Basically a double whammy for a momentum name.

I made the simple point that it wasn't some sort of skill that led the price higher, it was simply momentum, and in my view driven by assets like Bitcoin, which once they corrected, set the stage for the bigger Nvidia decline (see intra-market). This is effectively the old adage don't confuse brains for a bull market.

November 16th

The next day, I walked back through this divergence and intramarket concept as the gap between Nvidia and Bitcoin closed. Again, my points here were simple, ignoring these relationships (which are best expressed through charts) can be extremely damaging, especially with high flyers (yes we can debate the earnings report and what percent was crypto related, etc).

Nov. 23

Once the dust settled I made this simple point about the markets. Essentially a 50% decline in six weeks, which is exactly how momentum unwinds.

And lastly, the reality of valuation hit, with a full round trip in Nvidia's PE ratio.

Conclusion:

The Nvidia short was a combination of the following:

  • An initial 10X move in price, tripling of the PE, and a peak P/S of over 15
  • The BTC and Sox divergence in the summer of 2018
  • RSI and volume divergences on the weekly Nvidia chart, summer 2018
  • October, defined level at 233 opens up on the daily chart as clear support level (to break)
  • Pure momentum drawdown of over 50% coupled with a miss on both the top and bottom line

Today we see a full round trip in the PE ratio.

While the price to sales ratio has been cut in more than half...

And interestingly enough, it appears SoftBank (OTCPK:SFTBY) is now ready to sell the shares..

Thanks for reading.

This article was written by

Arun Chopra CMT, CFA profile picture
3.58K Followers
Arun S. Chopra CFA CMT MBA began as a research analyst in the Biotech sector. Arun has worked in wealth management, specializing in portfolio construction and hedging solutions, with a special emphasis on alternative investments. He has worked closely with alternative asset portfolio managers, hedge fund traders, and investment advisors on everything from single stock processes to longer term allocation decisions. He has earned both the CFA and CMT charters, with an MBA from New York University's Stern School of Business. His undergraduate education includes a study abroad program in micro and macro economics at Oxford University. His work has been published in the MTA's Technically Speaking. Outside of Finance, Arun spends considerable time in the independent film industry, having associate produced two full length features, Punching at the Sun (Sundance 2006, Best Picture SF Asian American Film Festival 2006 ), and Chee and T (Best Comedy LA International Film Festival 2016).
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The NVDA short position has been closed out.

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