If you think that Nvidia got where it is today because of its fundamental valuations, I am sorry but you might want to revise what “fundamental analysis” stands for.
It’s no secret anymore that the company has been using borderline legal accounting shenanigans and commercial practices to report much higher earnings than what their real business truly generates, but today I don’t care to talk about that again.
What’s important to address today, and this might have serious consequences going forward, is the fact that the (nominally) 3rd largest stock for market cap in the world swung ~100$ in price intraday from 974$ (that was a fest all-time high) to 875$ without any news, communication or general reason that could spread concern on the company business going forward.
If things became so ridiculous that even the SEC could figure out something was wrong and post a “say no to #fomo” warning on X, then the price action we saw today was potentially the Nvidia bubble hitting the needle.
Ponzi schemes and fraudulent companies can run a lot in the stock market, but only those who enjoy the tailwinds of investors’ euphoria can really make it in the history books for their spectacular booms and busts. Half of the Nvidia chapter, “the boom”, is already written, and get ready because what is likely coming next are the first pages of “the bust”.
Why did I choose such a title for my article? How can that be even possible to happen for such a large company out of the blue? I explained it a month ago in “ISAAC NEWTON, A GENIUS, WOULD HAVE LOVED $NVDA” what kind of losses can hit investors, even the brightest ones, when manias come to an end. However, what is very hard to time is when a mania ends.
I bet this weekend many (charlatans) will start writing about a “healthy pull back”, “technical correction”, and “Wave here and wave there”, to once again find elements to feed theirs and the masses’ hunger for a confirmation (bias) that Nvidia’s run didn’t just come abruptly to an end. The small problem is that 250bn$ dollars of “value” being vaporized in a few hours is something that will surely trigger some discomfort in many shareholders’ heads. If Nvidia mania was just an “old fashion” one created by investors bidding a #stocks to the stratosphere tulip-style such a +5%/-5% swing in a day would likely not have still been enough to undermine the mania, maybe just a speed bump. What about when a lot of the mania has been fuelled not by investors buying the stock directly but buying extremely leveraged derivatives on it?
Imagine what can happen to a person’s head when you are sitting long on a call option and in the span of a few hours the gains showed on your screen go from something like +7,243% to 30%. Imagine how that would feel if you were counting on cashing in those gains next week to pay off your credit card debt. Imagine how it feels if you borrowed extra money to place that bet trying to repay all your existing ones in the (wrong) belief Nvidia could never have a red anymore forever. Imagine if instead of having still a gain you instead started to see a loss on your screen. Do you think it looks already so scary and distressing? Imagine all those that at open shorted millions of Nvidia 900$ strike 0DTE put options for example and I don’t think I need to add anymore here.
Right now we are experiencing human exuberance channeled in the market through the most leveraged and volatile derivative instruments accessible to investors. As if this wasn’t enough, out there there are a lot of algorithms managing passive strategies that are wired to simply sell without thinking twice if a stock’s momentum turns negative. Do you think I am done? Of course not. Remember Archegos and those interesting exotic derivatives that can only be bought in the darkest corner of the financial market? Let me tell you a secret, there have been a ton of those built upon Nvidia during all its wild ride to the top and no they cannot just be sold in the same way you just click a button on your phone app. These positions are extremely leveraged and often of tens, hundreds if not billions in notional. A name like Nvidia swinging like it did today? Oh dear those risk managers for sure felt a chill on their back. Remember Archegos and not only how big but how fast the losses on these complex derivatives hit not only the market but the brokers (With one of those, Credit Suisse, left mortally wounded).
Never forget, psychology is a double-edged sword and euphoria can flip into panic in the blink of an eye because of how human survival instinct reacts to a threat that can significantly impair his/her life well-being.
After reading all I said so far, hopefully, you will agree with me that nobody should be surprised about Nvidia crashing 20% on Monday. If it doesn’t happen? The same words will remain valid for every single day thereafter because like it or not this event is a matter of when not if.