Why Is Nvidia Stock Going Down?

Updated on July 27, 2017
Stephen Sinclair profile image

Stephen Sinclair is a freelance Canadian writer who has been publishing professionally for several years.

Nvidia's Santa Clara, California head office.
Nvidia's Santa Clara, California head office. | Source

NVDA shares down 17 percent from all-time high

Over the past two years, shares of NVIDIA Corporation (Nasdaq: NVDA) have returned more than 600 percent, but over the past month NVDA stock appears to have potentially, at least in the short term, topped. NVDA stock is trading 17 percent below its all-time high, set on June 9.

Fundamentally, not much has changed with Nvidia. Yahoo Finance reports that Wall Street analysts have raised 2018 and 2019 consensus earnings per share estimates, from $2.83 to $3.09, and $3.35 to $3.50, respectively. Nvidia last reported an operating margin of 29.90 percent, a profit margin of 26.05 percent, and a return on equity of 38.05 percent. EPS is up triple-digits over most time periods.

The reasons stock in the Santa Clara, California processor producer has enjoyed such a dramatic run up in price appear to remain in place. This may change. However, why is Nvidia stock going down now? Will it go back up again?

No one knows with certainty whether Nvidia stock will go back up. It is possible. The further the price of NVDA stock falls from its all-time high, the more buying power, and work, will be required from the market to take it to new all-time highs again. Chances are probably high that NVDA stock finds a resting area at some point and consolidates. A period of quiet backing and filling, when speculators lose interest, is required when one-sided trades like the NVDA long become too hot.

However, more than anything else, one factor is weighing NVDA stock down: the Nasdaq Composite Index, which has suffered repeated distribution by institutional sellers, coinciding with NVDA stock's top and subsequent selloff. Today's Nasdaq trading saw the index close below its key 50-day moving average, on slightly heavier volume, once again. NVDA shares and the Nasdaq Composite both topped on June 9.

Distribution days pile up as the Nasdaq Composite closed below its 50-day moving average.
Distribution days pile up as the Nasdaq Composite closed below its 50-day moving average. | Source
A two-year chart for NVDA stock, showing its ultra-strong performance, far surpassing returns offered by the Nasdaq Composite.
A two-year chart for NVDA stock, showing its ultra-strong performance, far surpassing returns offered by the Nasdaq Composite. | Source

Nasdaq Composite weighs on NVDA shares

"Distribution days are like wine. A glass or two is fine. It's social, it's probably good for your digestive system. But one too many will send you reeling," Donald H. Gold with Investor's Business Daily wrote of distribution days, a brainchild of the newspaper's founder, William J. O'Neil.

A distribution day is a day when a major index closes significantly lower on heavier volume that the previous session. Distribution days are often accompanied by technical chart patterns, such as the head-and-shoulders pattern, which Adam Sarhan sees the Nasdaq Composite as being near completing. Additionally, the Nasdaq closed below its 50-day moving average today, Monday, July 3, while NVDA stock still trades above its 50-day moving average, which currently sits at $133.96.

For months, observers like Gary Kalbaum have spoken of the "split tape" nature of the current market. This was evident today, when leading names like Nvidia traded down 3.6 percent, and the Nasdaq was distributed, closing below its 50-day moving average, while the Dow Jones Industrial Average gained 129.64 points, or 0.6 percent.

Other, previously leading stocks, among them those issued by Facebook, Inc. (Nasdaq: FB); Apple Inc. (Nasdaq: AAPL); Alphabet Inc. (Nasdaq: GOOG, GOOGL); and Amazon.com Inc. (Nasdaq: AMZN), have faced similar weakness. How long the selling continues is impossible to predict.

Co-founder of MarketWatch.com, Kevin Marder, has described a tennis-balls-and-eggs technique, "Following an 8%-12% intermediate-term correction or outright bear market, the stocks that bounce back like tennis balls the fastest often represent the leaders on the ensuing advance."

Avoid the eggs, Marder implores his readers, "Conversely, the issues that sit there like broken eggs, hardly able to budge off of their lows, do not usually represent leadership vehicles during the next market advance."

Nvidia stock was a tennis ball as the market came out of its last correction. Will it be again? Or will new names emerge and replace it? How can investors know when a market selloff is over, and when it is safe to begin looking for so-called tennis balls? One method IBD recommends is the follow-through day, which it defines, "A follow-through day occurs during a market correction when a major index closes significantly higher than the previous day, and in greater volume. It happens Day 4 or later of an attempted rally. Leading up to a follow-through day, an attempted rally takes place during a downtrend when a major index closes with a gain. The rally attempt continues intact as long as the index doesn't make a new low."

Will Nvidia stock make new all-time highs, once again?

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    © 2017 Stephen Sinclair

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