The Investing Game: How NVIDIA's Decline Affects Market Momentum

The Investing Game: How NVIDIA's Decline Affects Market Momentum
The International Stock Market

Introduction: Recently, I've been asked about the recent drop in Nvidia's price. As a market leader, what are the potential negatives for investors? Generally, those who ask these questions underestimate the degree of uncertainty and variability that current financial conditions present. So, in an effort to explore where we are today, here is a hypothetical puzzle. Hopefully, this will give some insight into the Market's Momentum in light of Nvidia's crash.

The Momentum Game:

It's Super Bowl Season, so in keeping with that theme, here is a Football-based puzzle.

Suppose it's several years ago when the New England Patriots were the dominant team, led by one of the all-time great Quarterbacks, Tom Brady. It's the first playoff game, and Brady breaks his leg.

Your friends have asked you to bet on who will win the Super Bowl; altogether, your friends have given you $1,000. Enough to make the bet meaningful and to sting if you lost. (Feel free to adjust the bet to any level you feel best.)

Let's look at the various scenarios that might play out in this situation.

*Brady is so injured that he must sit out the remaining games, including the Super Bowl. How would you bet?

*Brady makes a miraculous recovery and comes back after the injury to lead the Patriots. How would you bet?

*The Patriots find a backup QB on the bench to lead them in the remaining games. How would you bet?

You have three betting options:

*You can bet for the Patriots to win.

*You can bet for the Patriots to lose.

*You can sit on the sidelines and receive a small amount of interest for your $1,000.

Conclusion

As you may have already guessed, this is exactly how I see the current Stock Market. Technical Analysts call this "Market Momentum." It's an analysis of the Market by looking at its strength, direction, and, most importantly, leadership.

I once worked for one of the greatest Momentum Traders of all time, William O'Neil. He made his fortune by focusing on Market Leadership and how those companies perform daily. In today's Market Game, that means that O'Neil would be hyper-focused on the health and performance of Tom Brady (the Quarterback).

If Brady fell, as in our hypothetical, O'Neil would consider this a negative to the Market, and while it may not be sufficient for him to bet against the Patriots, he would only continue with them if either he thought Brady would return or the Patriots could bring someone off the bench. Today, O'Neil's methods are continued in his publication, Investors Business Daily, and you can see its analysis at:

https://www.investors.com/

From my perspective, Nvidia's recent behavior replicates QB Brady's leadership. Nvidia has been the indisputable leader of the Market, rising in price more than any major company over the past year, positioned in the key AI Sector.

However, on Monday, Nvidia suffered a major setback when it fell by nearly 17% (note: most technicians consider 20% a full-on correction). This is equivalent to a QB injury, and now investors around the globe must decide whether to adjust their investment stance (their "bet"). Is this a fatal blow to Nvidia? Or just a minor bruise?

At this point, no one knows, and that's part of the uncertainty of investing. Nonetheless, investors must make a decision: Should they stand pat or begin to liquidate? Incidentally, doing nothing is "standing pat," the equivalent of betting on the Patriots.

Of course, today's discussion is an oversimplification of the investment process. There are many more dimensions to investing, such as the current valuation of Nvidia, which is over or undervalued. A thorough evaluation of the Chinese-based DeepSeek AI product, which was the proximate cause of NVIDIA's decline. And the overall value of the Market—is it in a bubble?

However, I wanted to introduce one of the most important components in Equity Investing: Stock Market Momentum.

Why not write down your bet, and we'll revisit this in a few months?

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Jamie Larson
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