Explaining Nvidia, Bitcoin and the Stock Market

Adam

Cryptocurrency

Stocks

Economic

Summary:

Nvidia’s drop despite strong earnings shows sentiment—not news—drives markets; media explanations often mislead.

There was a lot of investor hand-wringing and head-scratching experienced this past week. On Wednesday night, NVDA announced its earnings. And, not only were its earnings exceptionally strong, beating Wall Street’s expectations for both revenue and earnings per share, but they also provided strong forward-looking guidance.

At the time, the pundits claimed that this eased investor concern about a potential "AI bubble." So, Wednesday night and Thursday morning provided us with a gap higher in the stock price. As the day progressed, not only did the entire gap-up dissolve, but the stock ended the day in the red by almost 3%, approaching its lowest levels over the last month. And, again, to belabor the point, NVDA struck the lowest price for the stock over the last month on a day when it reported outstanding earnings and forward-looking guidance.

How could this even be possible? By every metric known to the mass investor community, this stock should have soared on Thursday and held a strong bullish move into the close. Well, by every metric other than the one that really matters - investor sentiment.

You see, earnings or forecasts do not drive stock prices, despite the erroneous belief held by the common investor. In fact, one of my long-term clients once noted:

“Having worked for many listed companies and regarded as an insider with access to company confidential information, I have sometimes struggled to understand the correlation between business results and the share price.”

I have outlined the reasons for this in detail in an article I penned a number of years ago, and I strongly urge you to read it here

So, I am not going to go into detail regarding my perspective again. But, I will point out something else I have discussed over the years.

Until the times of R.N. Elliott (the creator of Elliott Wave analysis), the world applied the Newtonian laws of physics as the analysis tool for the stock markets. Basically, these laws provide that movement in the universe is caused by outside forces. Newton formulated these laws of external causality into his three laws of motion: 1 – a body at rest remains at rest unless acted upon by an external force; 2 – a body in motion remains in motion in a straight line unless acted upon by an external force; and 3 – for every action, there is an equal and opposite reaction.

But, as Einstein stated:

“During the second half of the nineteenth century new and revolutionary ideas were introduced into physics; they opened the way to a new philosophical view, differing from the mechanical one.”

Yet, even though physics has moved away from the Newtonian viewpoint, financial market analysis has not.

“Many services and financial commentators in newspapers persist in discussing current events as causes of advances and declines. They have available the daily news and market behavior. It is therefore a simple matter to fit one to the other. When news is absent and the market fluctuates, they say its behavior is “technical.” Every now and then, some important event occurs. If London declines and New York advances, or vice versa, the commentators are befuddled. Mr. Bernard Baruch recently said that prosperity will be with us for several years “regardless of what is done or not done.” - R.N. Elliott

In the dark ages, the world was supposed to be flat. We persist in perpetuating similar delusions.” - R. N. Elliott

To explain this another way, taking a mechanical view of market dynamics is not the appropriate approach to profit in the market. You see, external events affect the markets only insofar as they are interpreted by the market participants. Yet, such interpretation is guided by the prevalent social mood. Therefore, the important factor to understand is not the social event itself, but rather the underlying social mood, which will provide the “spin” on that external event.

So, while an event, earnings or economic report can act as a catalyst for a stock or market move, the substance of that event, earnings or economic report will not necessarily be indicative as to the direction of the move. That is why we so often see markets and stocks moving in the opposite direction we normally expect based upon the substance of the event, earnings or economic report. The more important and driving factor is where we are in the market sentiment cycle, which will provide the spin as to how market participants will interpret the event, earnings or report with their buying or selling.

In our case, NVDA topped with a spike high at the end of October, completing an Elliott Wave 5th wave in its sentiment cycle. Therefore, the rally we saw this past week was simply part of a corrective rally, which ultimately led to lower levels, which, again, was within our expectations. This is a much more reasonable, understandable, consistent, and intellectually honest explanation as to what occurred after the earnings announcement, especially as compared to the mental gymnastics you likely heard as strained explanations from the pundits.

And, speaking of mental gymnastics, the decline we have seen this past week in the equity market seems to have taken many by surprise. But, the mental gymnastics that were on display as the media tried to explain the decline have been nothing short of perfect Olympic 10 score movement.

Many analysts and pundits in the media went on and on about how Bitcoin seemingly caused the equity market decline seen this past week. And, after I finished chuckling at the absurdity of this perspective, as they truly had to stretch for this “reason,” I saw they were all silent as Bitcoin continued lower during the middle of week whereas the stock market rallied.

At some point, you, as an investor, must seek out intellectual honesty and consistency in the analysis you choose to follow rather than superficial excuses that are completely ignored hours later.

Clearly, the media is only able to provide a very superficial and mechanical perspective of how the market works. This is how they try to satisfy the common investor’s need for control. From a psychological perspective, investors feel as though they are in control if they can understand the reason why a market move occurs. And, it seems that they will accept any reason whatsoever, no matter how absurd or stretched the logic behind it presents.

But, I have a secret for you. Investors are not in control of the market no matter how much they believe they “know” the reasons for a market move. In fact, no one is.

If investors are being honest with themselves, they would track these reasons over time, which will then, no doubt, lead them to recognize that these pundits and analysts will often provide to you the exact same reason for a market decline as they do for a market rally at times. I have actually seen it myself wherein they provided the exact same reason for a decline as for a rally all within one 24-hour period. Yes, my friends, intellectual honesty is not going to be found in the media amongst the pundits and analysts alike. “Reasons” will not help you in increasing your profitability in the market, and will often detract from it.

This leads me to again present a quote from Robert Prechter’s seminal book, The Socionomic Theory of Finance (which I strongly suggest to each and every investor):

“Observers’ job, as they see it, is simply to identify which external events caused whatever price changes occur. When news seems to coincide sensibly with market movement, they presume a causal relationship. When news doesn’t fit, they attempt to devise a cause-and-effect structure to make it fit. When they cannot even devise a plausible way to twist the news into justifying market action, they chalk up the market moves to “psychology,” which means that, despite a plethora of news and numerous inventive ways to interpret it, their imaginations aren’t prodigious enough to concoct a credible causal story.

Most of the time it is easy for observers to believe in news causality. Financial markets fluctuate constantly, and news comes out constantly, and sometimes the two elements coincide well enough to reinforce commentators’ mental bias towards mechanical cause and effect. When news and the market fail to coincide, they shrug and disregard the inconsistency. Those operating under the mechanics paradigm in finance never seem to see or care that these glaring anomalies exist.”

So, are you going to ignore the action you saw with your own eyes this past week? Are you going to shrug and disregard the inconsistency between the earnings, guidance and stock price? Are you going to ignore the glaring anomalies you witnessed yourself? Only you are responsible for growing and protecting your investment account. The question you need to honestly ask yourself is if you are using the proper tools in doing so?

Source: investing

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Explaining Nvidia, Bitcoin and the Stock Market

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