šAI Bubble Still Growing
Shorts made money this week
Welcome back to MktContext. We study the US economy and time the stock market.
Current market timer: HOLD
For the past two weeks we've said stocks are over-extended and due for a pullback. Our shorts have been correct, however pullbacks have been shallow and dips are being bought aggressively.
It is very difficult to be bearish in this environment. The trend is extremely strong, for all the reasons we've been highlighting in recent posts. Instead of fighting the trend, listen to what the market and price signals are telling you.
Every investor wants to know if this is the top. To answer that, we need to look at the underlying drivers of the stock marketā¦
Todayās topics: Nvidia earnings, AI demand, oil prices, interest rates, market outlook, our portfolio.
Nvidia earnings
Nvidia reported its quarterly earnings. Many investors expected a strong reaction but as usual, it disappointed and the stock fell 2%. In fact, it hasnāt had a strong post-earnings rise since 2022. Thatās because traders almost always overhype the event. For those who are able to day-trade, it has become a reliable and highly profitable short the day after results are released.
Below was the options positioning immediately before the earnings event. Demand for calls (bullish bets) was at max while puts were at zero. Demonstrating extreme bullish sentiment and expectation that is nearly impossible to beat. Nvidia has been at the center of the AI boom; investors were already assuming strong growth. Because of that, it is harder for the company to surprise the market.
Whereas NVDA stock itself didnāt perform well, other companies connected to Nvidia did very well. These are often called āpicks and shovelsā businesses. They supply parts used in Nvidia systems. Memory companies stood out, with stocks up 6-10% in a single day. Other parts manufacturers did this:
A key reason for this reaction comes from Nvidiaās next gen rack system, called Rubin. Rubin will multiply the memory and componentry needs of AI data centers ā some by as much as 400%. Thatās why component producers (memory, circuit boards, power systems, cooling systems) continue to skyrocket.
On the other hand, Nvidiaās own chips are making up a smaller and smaller part of the system. And its profit margins are shrinking as well. Thatās why NVDA stock was down, yet the AI ecosystem is simultaneously thriving. Demand for advanced systems is still increasing. The AI bubble is still growing.
Weāve highlighted this dynamic many times in the past. This is how capital cycles for new technologies naturally progress. Bottlenecks shift to new areas like CPUs, memory, and substrates. That is how we identify the next group of stocks with explosive growth.
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AI demand is strong, even if NVDA weak
Oil prices and interest rates falling
Stock market outlook: Where we go from here
Our trades and portfolio
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