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Expect Fireworks When Key Resistance Levels Broken

January 3, 2024
NASDAQ 100 (NDX) 6-month candlestick chart
NASDAQ 100 (NDX) 6-month candlestick chart

The Nasdaq 100 is hitting resistance around the all-time peak around 17,000, which has proved unbreachable on three occasions so far over a two-and-a-half-year period. The more this happens the more significant that 17,000 becomes. It will be decisively breached one day and that will likely launch a significant upward move.

The position is even more intriguing with the Nasdaq Technology Sector index, where there is a key round number involved as well. This index will look exciting when it breaks convincingly through 10,000.

NASDAQ 100 Technology Sector (NDXT) 6-month candlestick chart
NASDAQ 100 Technology Sector (NDXT) 6-month candlestick chart

One of the greatest round number breakthroughs in US stock market history came in 1983 when after a decade of trying the US Dow Jones Industrials index broke decisively through 1,000. Over the next 16 years the index rose more than 16-fold.

On 2 January, the first day of trading for 2024 (how unbelievable that I am writing this in 2024, I feel like the immortal Gandalf albeit with rather more aches and pains) the Dow Jones actually reached a new all-time peak. It was the technology focused indices that fell sharply, down 3.14pc for NDXT. This suggests to me that what was happening was profit-taking. Tech shares with big gains in 2023 fell sharply while more pedestrian performers in other sectors were unaffected.

Dow Jones Industrial Average (DJI) 6-month candlestick chart
Dow Jones Industrial Average (DJI) 6-month candlestick chart

Three Factors Driving Bull Market, Technology, Technology & Technology

What is driving this bull market, three things, technology, technology and technology. And which is the greatest technology stock of them all. There are some fabulous contenders out there but one, as I may have mentioned in the past, is semiconductor company extraordinaire, Nvidia, which has itself developed a chart with an important round number resistance level.

The shares first topped $500 in August 2023 and have since repeated that achievement but have fallen back every time including currently. Reasons may be a mixture of profit-taking and a cautious article in the Wall Street Journal headlined – ‘Tech’s AI Hangover Might Just Be Getting Started’ — Heard on the Street. The writer posed the question that AI might take longer to deliver serious sales and profits than investors expect.

Adobe has already shown what AI letdown can look like. The software maker’s stock price rose more than 85pc for the year ahead of the company’s fiscal fourth-quarter report last month, as investors had high hopes that Adobe’s new GenAI tools such as Firefly would spark a surge in demand. But Adobe ended up using the report to project only 10pc revenue growth for the new fiscal year — flat compared with the previous year’s performance and a number that most analysts viewed as Adobe being conservative. The stock has still fallen more than 7pc since.

A similar turn in sentiment could haunt many of tech’s fourth-quarter reports starting later this month. “We worry AI benefits may materialise later than many expect,” wrote Scotia Capital software analyst Patrick Colville in a note to clients before the holiday break. In his own report around the same time, Alex Zukin of Wolfe Research wrote that “we are at peak AI hype with a likely slide into the trough of disillusionment, as actual GenAI revenue dollars take longer to materialise yielding at most low single digit upside to CY24 revenue estimates.”

Dow Jones Newswires, 3 January 2024

It is the old story. Stocks climb a wall of worry. Many tech stocks, especially the mega-caps, had a great 2023 so it is understandable that some observers feel cautious about 2024. Nevertheless it is unlikely that we are going to see too much weakness. Long-term charts, including for Adobe, still look full of potential and I still believe that the technology revolution is not just continuing but accelerating driven by multiple opportunities and massive r&d spending.

Strategy – Hang in There

Short-term trading is just too hard and is the way that madness lies. The way to win in the stock market is to take a position and have faith unless something really meaningful happens to destroy that faith. Maybe we have been too excited about GenAI in the short term but some wise old heads like Bill Gates, co-founder of Microsoft, are telling us that the excitement is fully justified.

In my lifetime, I’ve seen two demonstrations of technology that struck me as revolutionary.

The first time was in 1980, when I was introduced to a graphical user interface—the forerunner of every modern operating system, including Windows. I sat with the person who had shown me the demo, a brilliant programmer named Charles Simonyi, and we immediately started brainstorming about all the things we could do with such a user-friendly approach to computing. Charles eventually joined Microsoft, Windows became the backbone of Microsoft, and the thinking we did after that demo helped set the company’s agenda for the next 15 years.

The second big surprise came just last year. I’d been meeting with the team from OpenAI since 2016 and was impressed by their steady progress. In mid-2022, I was so excited about their work that I gave them a challenge: train an artificial intelligence to pass an Advanced Placement biology exam. Make it capable of answering questions that it hasn’t been specifically trained for. (I picked AP Bio because the test is more than a simple regurgitation of scientific facts—it asks you to think critically about biology.) If you can do that, I said, then you’ll have made a true breakthrough.

I thought the challenge would keep them busy for two or three years. They finished it in just a few months.

In September, when I met with them again, I watched in awe as they asked GPT, their AI model, 60 multiple-choice questions from the AP Bio exam—and it got 59 of them right. Then it wrote outstanding answers to six open-ended questions from the exam. We had an outside expert score the test, and GPT got a 5—the highest possible score, and the equivalent to getting an A or A+ in a college-level biology course.

Once it had aced the test, we asked it a non-scientific question: “What do you say to a father with a sick child?” It wrote a thoughtful answer that was probably better than most of us in the room would have given. The whole experience was stunning.

I knew I had just seen the most important advance in technology since the graphical user interface.

This inspired me to think about all the things that AI can achieve in the next five to 10 years.

The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone. It will change the way people work, learn, travel, get health care, and communicate with each other. Entire industries will reorient around it. Businesses will distinguish themselves by how well they use it.

Bill Gates, The Age of AI Has Begun, 23 March 2023

If he is anywhere near right we are nowhere near peak AI and investors need to capitalise on what should be the huge opportunities that lie ahead. Shares go up and down, quite violently some times. We just have to get used to it.

A more positive view on AI prospects, especially for semiconductor companies, came with an article in Barrons.

This year is set to be another big one for artificial intelligence after the technology’s hype drove the tech stock rally in 2023. UBS analysts are backing the sector, and are boosting their revenue estimate for the AI industry by 40pc.

The analysts, led by Sundeep Gantori, now expect the AI industry to generate $420bn in revenue in 2027, up from $300bn previously. The new estimate implies a compound annual growth rate of 72pc when starting from a baseline of $28bn in revenue in 2022, according to UBS.

“In 2024, the semiconductor and software industries are well positioned to ride the AI wave, with both industries expected to post solid double-digit profit growth and operating margins of more than 30pc, in our view,” Gantori wrote.

Some predictions are calling for AI’s benefits to spread beyond the initial hardware suppliers to boost a whole range of stocks from retail to finance. However, Gantori’s team still expects the semiconductor industry to be the heart of the boom for now.

“We expect the GPU [graphics processing unit] and chip segment to be the best near-term beneficiary of strong AI spending,” the UBS analysts wrote.

For the GPU and chip segment specifically, the UBS analysts estimate a 60pc compound annual growth rate between 2022 and 2027, driving annual revenue from $15.8bn to $165bn over the same period.

The analysts didn’t pick out any individual stocks, but these figures bode well for Nvidia, which has a dominant position in GPUs used for training AI models. The scale of the growth also suggests there is room for multiple winners — that could be good news for Nvidia’s would-be challengers, including Advanced Micro Devices and Intel.

Dow Jones Newswires, 3 January 2024

Share Recommendations

  • Nvidia (NVDA) Buy @ $478

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