As Nvidia (NVDA) stock soared past earnings expectations, investors found themselves riding the wave of success alongside adjacent AI stocks. However, as history has shown, bull markets eventually come to an end. Eric Krull shares insights on safeguarding your investments against inevitable pullbacks.
Nvidia’s recent earnings report for its fiscal fourth quarter showcased not just a beat but also guidance that surpassed expectations. The surge in enterprise demand for its AI-focused graphics processors propelled the company’s shares to new heights.
Yet, amidst the euphoria surrounding Nvidia’s earnings triumph, Eric Krull, co-author of “The Lifecycle Trade,” warns of potential pitfalls. Speaking on Investor’s Business Daily’s “Investing with IBD” podcast, Krull highlights the need for caution in times of heightened excitement around a single stock. He draws parallels to past instances, such as Palo Alto Networks (PANW), where strong performance leading up to earnings didn’t shield the stock from post-report declines.
To mitigate risk ahead of Nvidia’s earnings, Krull employed hedging strategies, opting to purchase puts as insurance against adverse moves. He emphasizes the importance of prudence, particularly when a stock garners significant media attention and speculative fervor.
The meteoric rise of Nvidia shares since breaking out of a flat base in early January has been nothing short of remarkable. The company’s dominance in the GPU space has earned it top rankings across various industry lists, including Tech Leaders and IBD 50. With a Composite Rating of 99, Nvidia maintains its position as a leader in the Electronics- Fabless Semiconductor sector.
The ripple effects of Nvidia’s success extend beyond its immediate sphere, buoying the broader tech sector. Companies with ties to the chip industry, such as systems maker SMCI (SMCI) and chip design firm ARM (ARM), witnessed upticks in their stock prices following Nvidia’s stellar earnings announcement.
Krull advocates for the use of tools like climax indicators and trailing stops, including the “Everest rule,” to safeguard investment gains. These indicators, rooted in principles outlined by Investor’s Business Daily Founder Bill O’Neil, help investors identify potential climax tops in stock prices, guiding decisions on setting trailing stops particularly during parabolic moves.
While the allure of generative AI stocks like Nvidia continues to fuel market optimism, Krull advises investors to remain vigilant about potential exits. Citing historical data, he notes that the majority of rallies tend to last 50 trading days or less, signaling the importance of anticipating corrections. March and April, historically prone to stock selling due to U.S. tax deadlines, often witness market adjustments, making it opportune for investors to reassess their positions.
In conclusion, while the trajectory of Nvidia stock remains impressive, investors must remain proactive in managing risk and identifying exit strategies to navigate the inevitable fluctuations of the market.
