NVIDIA surge continues as investors flock to AI stocks – how much further can it go?
US equity indices took a tumble earlier this week after the latest CPI data showed prices had risen more than expected in January, pushing back the need for rate cuts from the Federal Reserve. But stocks have come back swinging with the S&P 500, US Tech 100 and Russell 2000 all resuming their bullish trends after a minor pullback.
The tech sector remains a key driver of bullish momentum, but one stock is taking the podium. NVIDIA has rapidly become the new market sweetheart and has been soaking up the AI frenzy, rising over 60% this year alone. The chipmaker has overtaken Alphabet and Amazon's valuation after its share price breached the $700 mark earlier this week. Demand for digital intelligence has been driving the recent rally in the stock market and NVIDIA’s success is based on being able to provide the necessary technology to power AI.
But many are sceptical that the stock will be able to keep up with its stellar performance from last year, having risen over 250% in 2023. Morgan Stanley has increased the price target for NVIDIA shares to $750 from just over $600 last week as it continues to see very strong near-term strength – but how far can it go before investors find it to be too expensive?
NVIDIA daily chart
(Past performance is not a reliable indicator of future results)
For now, the gains look unlimited as the stock has attracted so much attention it is creating some sort of a bubble. Fundamentally, the forecast is strong as the company has high growth potential but it’s not uncommon to see heightened volatility with a stock that has achieved such a high profile. It is also important to note that the company is likely to face increased internal and external competition over the coming months. Short sellers will be looking to take advantage of any pullbacks which could deepen the losses if the momentum turns. The RSI has been strongly overbought for the past two months but that hasn’t deterred investors as of yet, and the daily chart is also lacking any major signs of weakness up ahead. That said, investors should monitor how the RSI and price evolve over the coming days. If we see a higher high in price but the RSI fails to push above the high from February 5th then we could have an RSI divergence unfolding, which would suggest a shift in momentum, even if short-lived.
US Tech 100 reverses recent losses, but the RSI suggests more weakness could be ahead
Meanwhile, the US Tech 100 has found support along the 20-day SMA (green line) after the pullback earlier this week. The lack of appetite to be a seller in current conditions has allowed the index to reset its overbought RSI with a marginal pullback whilst having a limited impact on price, setting the scene for further bullish momentum to arise.
The recent shift in market mentality has allowed strong economic data to be accepted by stock traders without fearing continued high rates. Markets should be concerned about what the Fed is concerned about, which is cutting too soon and then having to hike again. That would likely be the worst scenario for the bullish rally, and so for now if the economy is showing resilience and that is allowing the Fed to hold off on cutting rates, then so be it, or at least that is how markets seem to have been behaving over the past few days.
With this in mind, the index seems in good shape to continue pushing the recent highs but traders should be aware that, similar to NVIDIA, the US Tech 100 has a bearish RSI divergence underway, with the higher highs in price not having been matched by higher highs in the RSI, which suggests a bigger reversal could be on the cards in the short term.
US Tech 100 daily chart
(Past performance is not a reliable indicator of future results)