NVIDIA Corporation (NVDA) creates huge distortions across the market, making it appear stronger than it actually is. The most obvious distortion is the Nasdaq 100 Index (Nedix) and Invesco QQQ Trust ETFs (Nasdaq:HeheheheThis has created a large gap between market cap weighted indexes and ETFs and equal weighted indexes and ETFs.
More than 40% of profits
So far in 2024, through June 5th, Nvidia has accounted for about 42.2% of the Nasdaq 100 Index’s gain. This means that of the 2,209 points that the Nasdaq 100 Index has gained, Nvidia has contributed 932 points. That’s a huge amount, considering that the index currently has only 62 advancers and 42 decliners.
Comparing this to the NASDAQ Equal Weight Index: Again, NVIDIA accounted for about 31% of the total increase, adding about 84 points to the equal-weighted index’s gain of 271 points. However, the equal-weighted index is up only 3.8% for the year, while the Nasdaq market cap weighted index is up 13.1%.
Big Differences
Also, while the QQQ easily surpassed its March high, the Direxion NASDAQ-100® Equal Weighted Index Shares ETF (QQQE) has yet to surpass its March high, again illustrating the impact one stock can have on the overall market and how it dictates investors’ perception of the overall market health and strength.
The big difference in performance led to the Nasdaq 100 vs. the Nasdaq 100. The peer index expanded to nearly 2.57, its largest record since 2006, when the first data points became available.
Most stocks can’t keep up the pace
Taking a closer look at the Nasdaq 100, we see that only 33 stocks have actually outperformed the market cap weighted index this year, with the remaining stocks lagging the broader Nasdaq 100. So while advancers are outperforming decliners in the overall index, the majority of stocks are not keeping up with the overall index gains.
This means that NVIDIA’s strong performance is exaggerating the strength of the overall market, meaning that if NVIDIA’s stock price falls, the overall stock market could take a hit as NVIDIA’s stock price normalizes or falls. I recently discussed How dependent the entire stock market has become on Nvidia.
Stock split
The recent rise in the stock price could be due to strong performance last quarter and optimism for the future, or the stock price could simply be rising due to a stock split scheduled for after the close on June 7. We have seen this type of movement before, with the stock price rising before an expected stock split and then falling after the split occurred.
What’s clear at this point is that Nvidia is on a steep rise. Whether this rise is justified in the long term is another question, but the pace of the recent rise has been insane. Given the size of Nvidia’s market cap, it has distorted market cap weighted indexes, making them appear stronger than what is really happening beneath the surface and the performance of the majority of the stocks in the index.
That means that the market is highly dependent on just one stock at the moment.
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