The Volatility of NVIDIA in the Eyes of Traders - A Comprehensive Observation

"Viewing the world from the trading desk, Fu Peng discusses finance"

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Viewing the world from the trading desk, Fu Peng discusses finance. Next, we will continue to explore topics related to NVIDIA. During the holiday period, I noticed that NVIDIA garnered significant attention, closely related to its market performance.

Of course, another dimension is related to China's Deepseek company, but I believe this connection is not entirely direct. We cannot simply attribute NVIDIA's performance solely to the impact of Deepseek.

Looking back to June last year, during the second quarter, we had in-depth discussions with several domestic public fund managers about a month and a half in advance. Regarding the development and application of AI technology, industry researchers are clearly more proficient than we are. Therefore, I analyzed the market and individual stock situations more from a trader's perspective and issued early warnings.

At that time, NVIDIA experienced a significant stock price drop in June, an event that can be verified in public records. After the stock price flash crash, many attributed it to the yen carry trade. However, from a trader's perspective, the reason is quite simple: NVIDIA's leverage was too high, market expectations were too high, while volatility was too low, leading to a transmission effect from the asset side to the liability side.

But the key question is, is there a problem on the asset side of the U.S. stock market? If it is merely high leverage, then by reducing the leverage of certain investors, market logic would return to normal. Therefore, I suggested at that time that investors need not panic; volatility would eventually decline again.

Last year, at the peak of volatility, we promptly held a video conference. To this day, I still maintain this view: regarding NVIDIA, I prefer to examine it from the perspective of trading experience. Although technical personnel and industry research experts provided detailed reports, for stock traders and asset allocators, daily price movements are not always highly correlated with fundamentals.

Therefore, in individual stock analysis, while fundamental analysis is the main line, the application of technical aspects, trading strategies, and market micro-levels is equally important. From NVIDIA's last stock price flash crash to its new historical high, there has been no fundamental change in NVIDIA. Thus, understanding the cyclicality of the industry chain and its impact on leading stocks is crucial, including the timing of valuation expansion and changes in short-selling behaviorTherefore, when conducting technical and fundamental analysis, especially in stock analysis, while fundamental analysis is a main line, when it is implemented at the technical, trading, and strategic levels, and even in thinking about the micro-level of the market, especially when we observe very micro phenomena in history, you will find that there is a certain span between it and the technical aspect. This span may be two to three years, or it may be one to two months.

In other words, from the last stock price flash crash to the next historical high, did NVIDIA undergo significant changes during this period? In fact, it did not. Therefore, in our analysis, we must understand the cyclicality of the industry chain, especially its impact on leading stocks. For example, in the early stage of valuation expansion, there is a large amount of short selling; in the late stage of valuation expansion, the market gradually matures, and short selling behavior significantly decreases; from valuation expansion to valuation regression, and then to normalization of value. I have elaborated on these points in detail during the series on U.S. stocks presented by Fu Peng in January.

I gradually deduced from the macro level to the meso level, and then to the micro level, where I also mentioned the transition of NVIDIA from technological transformation to value market. This was the situation in 2021, and after that wave of valuation correction, you will find that many characteristics are consistent. For example, during the valuation expansion phase, trading volume usually remains at a high level; once it enters the value phase, trading volume declines. I have mentioned this before.

By 2022 and 2023, the certainty of artificial intelligence (AI) has already emerged. If there are still people questioning whether AI can drive the improvement of total factor productivity, I believe the market has already provided an answer. When market certainty appears, valuation no longer expands but relies on performance growth to drive stock prices, trading volume shrinks, and investors are reluctant to easily sell their shares. Because for most investors engaged in asset allocation, they do not care about daily price fluctuations, so the overall trading volume will not be large. This is the market characteristic in the eyes of traders.

Recently, I presented a chart during my roadshow in January, pointing out that NVIDIA seems to have formed a symmetrical pattern since its stock price flash crash last June. I often say that the macro, meso, and micro levels need to be interconnected to truly understand the overall picture of the market. Many people always want to find answers at a certain point, but this often means ignoring other aspects. For example, if you focus on macro analysis, you must give up attention to intermediate price fluctuations; if you focus on meso-level cyclical analysis, you also need to ignore daily price fluctuations. You cannot assume that the entire industry chain has undergone fundamental changes just because the stock price suddenly crashes or skyrockets. Many times, we need to have trade-offs, and it is best to observe the market comprehensively.

We can see that NVIDIA's stock price has formed a converging triangle technical pattern. Technical investors really like this type of pattern analysis. From valuation correction to the second wave of initiation, and then to valuation elevation, the entire process is relatively stable. At this time, the rise in stock price mainly relies on performance growthIn the volatility of June, we can see that when valuations rise to a certain level, the market's expectations for performance can only support a price-to-earnings ratio of around 50 times at most. In fact, once valuations reach around 50 times, the room for further expansion becomes very limited. Therefore, the market's valuation expansion phase is basically over, and the subsequent rise in stock prices will mainly rely on performance growth. If NVIDIA's performance can continue to grow, then the stock price will gradually rise.

Another characteristic is that the overall trading volume shows a shrinking trend. When all high-growth performance expectations have been fulfilled, the market believes that everything that should be realized has been realized. At this point, the chips are too concentrated, and the market volatility is too low, making it easy for a slight disturbance to trigger a flash crash. This disturbance may come from the macro level, the meso level, or even just from the amplification of volatility and sell-offs at the technical level.

Currently, NVIDIA's stock price volatility has risen again, but its impact on overall market volatility has weakened. If you observe the VIX index, you will find that it has not triggered the same dramatic changes in overall market volatility as it did in June.

The current overall market volatility is more related to Trump's macro policies, trade wars, and tariff issues. At the meso and micro levels of the industrial chain, the impact is relatively small. Recently, the market's panic sentiment towards NVIDIA has eased, and trading volume has shrunk again, indicating that the market has entered a relatively stable phase.

In fact, Wall Street had already observed the stagnation phenomenon of NVIDIA's stock price in mid-January. From December to January, the stock price had shown signs of stagnation, with both volatility and trading volume at low levels. This means that the market is waiting for some signal, either waiting for no bad news, with performance continuing to grow and pushing the stock price to rise slowly; or waiting for bad news to appear, releasing some chips. The current market trend leans more towards the latter.

At this stage, many investors on Wall Street, including the Value Investors Club and some famous investors' blogs, are lowering their expectations for NVIDIA. Even without the influence of Deepseek, there is a general consensus that the phase of high growth and high excess returns has ended. Therefore, as I mentioned earlier, this year, the U.S. stock market is transitioning from leading companies to the application end, and excess returns will gradually sink. Just like the development of the industrial chain, when leading companies have stabilized, excess returns will appear more in the downstream of the industrial chain. Leading companies find it difficult to achieve excess returns again because the unexpected growth no longer exists.

In the past few years, NVIDIA, as a leading company, has experienced a phase of high growth and high excess returns. However, starting from the stock price flash crash in June 2024, I believe this is a signal marking the end of this phase. This is not a systemic risk, but a signal, whether it is a valuation signal, a growth realization signal, or a stock price signal, all indicating the end of a phase. This signal can only be fully understood after history has played out.

From the perspective of industrial characteristics, regardless of whether there is competition from Deepseek, new competitors will always enter the market, which is an inevitable law of industrial chain development. Although we may not understand artificial intelligence, algorithms, or computing power, we understand the laws of industrial chain development; the changes are always rooted in the same principlesTherefore, NVIDIA will not collapse at present; the industrial chain has become relatively complete, and the moats of leading companies are gradually forming. However, I believe it has completed the high-profit stage and will enter a phase of wide fluctuations next. In this phase, NVIDIA will face challenges from competitors and will need to defend its moat. If it fails, it will naturally be eliminated; if it succeeds, it will enter a mature stage.

The performance in the mature stage will differ from the upward trend of the past decade. The upward pattern that began in 2016 may no longer be applicable, which is something to pay special attention to.

Everyone can combine this with relevant past content for a deeper understanding to better grasp market changes. This is the main content of this issue of Fu Peng's talk, and we will see you next time.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at their own risk