Lower trading volume can signal buyer fatigue

by Nvidia Corp NASDAQ:NVDA 59% gain since the start of 2024 boosted the SPDR S&P 500 ETF Trust NYSEARCA: SPY and Invesco QQQ NASDAQ: QQQ to new highs.

Notably, Nvidia is pushing other AI stocks higher, resulting in broad market highs.

The meteoric rise of a great stock can supercharge the momentum of the broader market. This may boost investor confidence, but eventually the euphoria subsides.

Now, does this mean an accident is imminent? Probably not.

But at some point no stock continues to rise without taking a break, which is something investors should remember, even if markets rise.

Does trading volume indicate a slower pace of buying?

Led by Nvidia, following the company’s latest earnings report, the S&P 500 index rose 2.07% on February 22, reaching a new high. Trading volume was slightly lower than average, although part of this may have been due to a shortened holiday week.

If you look back a few years on the SPY ETF chart, you can see that the S&P saw some huge price gains, on a percentage basis, in March 2000, just before the index turned around. At the time, tech euphoria was also driving stocks to new highs.

If you look at MarketBeat’s Nvidia chart, you’ll see that trading volume in the stock was higher than normal on Feb. 22, but not an all-time high.

Again, this could simply be the effect of a short week on Wall Street, but it could also indicate that some fatigue is setting in, despite continued optimism about Nvidia’s AI capabilities.

Nvidia’s institutional ownership data tells the story of how the stock rose to these highs: Over the past 12 months, 2,987 institutional buyers accounted for $659.91 billion in inflows, versus 2,326 institutional sellers who accounted for $46.78 billion of dollars in outflows.

Pullbacks are not uncommon after big rallies

Much of this selling occurred in September and October of last year, when the broader market was also selling off as investors realized the Federal Reserve would keep rates higher longer.

But that broad market pullback in 2023, before the rally resumed in late October, wasn’t that unusual, after the S&P 500 rose 28% in a year. This is about the level where investors start to take some profits.

A January article from US Bank Wealth Management, “Is Another Market Correction Coming?” warned of continued lack of breadth, even as the market is in a rally led by tech stocks.

On a monthly basis, all 11 S&P sectors are trading higher, but US Bank noted that the same risks the market faced in 2023 remain, including inflation, interest rates, geopolitical developments and the potential for a bubble technological.

Analysts see a more limited rise in Nvidia stock

Forecasts from Nvidia analysts at MarketBeat don’t show the “screaming buy” you might expect; instead, the prevailing sentiment is “Moderate Buy,” with a price target of $820.03, an upside of just 2.67%.

This indicates an expectation of a slower pace of growth over the next 12 to 18 months, with a pullback almost certainly priced in.

Nvidia stock is in extended territory, trading about 34% above its 50-day line. This is exactly the type of chart action that often results in a pullback, which in turn can present a new buying opportunity.

Sandeep Rao, senior researcher at Leverage Shares, an asset manager specializing in leveraged and inverse ETFs, said in an email that there are a few reasons why investors should be cautious about Nvidia right now.

Nvidia is part of a cyclical industry

“While recent earnings have been exceptional, a deeper analysis reveals a lack of sustained growth trends across key metrics,” Rao said. “The company’s success depends on a specific mix of consumers that may not last.”

Semiconductor stocks are notoriously cyclical; Nvidia itself has gone through these cycles in the past. Investors are deluding themselves if they think “This time it’s different” and customers won’t cut spending, or spending won’t stabilize for some time, even though AI is undeniably a long-term growth area.

Rao also cited premium pricing for Nvidia, including its price-to-earnings ratio of 61, which is frothy to say the least and will no doubt give some investors pause.

Echoes of the Nifty Fifty

Rising costs for the company could also impact earnings, Rao added. Unlike fully integrated chip makers, he said, Nvidia relies on Taiwan Semiconductor Manufacturing New York Stock Exchange: TSM for production, reducing control over costs and future innovations.

Finally, Rao cites echoes of the past as a reason for caution. Comparisons with the “Nifty Fifty” stocks of the 1970s “suggest a potential bubble and eventual correction in high-flying tech stocks like Nvidia.

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