If NVDA sneezes, does the rest of the market catch a cold?

Paradigm Capital Aazan Habib sees signs of a potential for a sector rotation and openly wonders how long the current market darling can keep it up.

In a technical and quantitative analysis report to clients March 10, the analyst says things may be ready to change with this bull market, though he does not have 100 per cent conviction that it will.

“If NVDA sneezes, does the rest of the market catch a cold? Major reversal signal on Friday only has validity if it sees downside follow-through. The S&P 500 is also approaching a major target but no confirmed sell signals yet. Watching the 10-day EMAs for short-term support,” Habib said.

The analyst said the chartist in him is wary.

“NVDA put in a major bearish engulfing candle on Friday, but this is only valid if it sees downside follow-through this week. We are watching the 10-day EMA at $843 as the first level of support that needs to break to suggest a corrective phase may be starting. The stock’s volatility-adjusted deviation from its 50-day moving average is evidence of extremely overbought conditions and a potential intermediate-term top,” he wrote.

“Similarly, the S&P 500 is showing signs of getting tired as it approaches the lower end of our target range of 5200-5400, which we outlined in our Q1/24 outlook report,” Habib added. “A break below the 10-day EMA at 5102 would be the first sign that a corrective phase may be starting. While the semis and leading growth merchandise are showing signs of getting tired, there is evidence of rotation into other sectors and the value factor as breadth and risk appetite
remain healthy. We see energy, real estate, industrials, financials and health care as groups poised to benefit from rotation.”

And while “The Magnificent Seven” have owned the headlines in this bull market, the analyst says there are solid signs that the wealth may soon spread to smallcap stocks, which are trading near historic lows.

“The TSX Venture Composite is also showing signs of a bullish character change as it recaptures the 40-week EMA. We are looking for a monthly breakout through the 600 level to confirm a new bull market for Canadian microcaps after a 3-year bear market,” Habib said.