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Artificial intelligence (AI) has become a rental car.
Semiconductors, memory, cybersecurity, connectors, power providers, and any other stocks related to artificial intelligence have gone parabolic.
The remarkable advance has been unlike anything we’ve seen since the dot-com bubble inflated back in 2000. And, while some folks will argue that it’s different this time because today’s action is in real companies with real revenue and earnings, parabolic moves are dangerous.
They always end badly.
For example, let’s look at the current setup in Marvell Technology (MRVL)…
MRVL was a $192 billion company before the opening bell rang on Tuesday morning. It was a $255 billion company at the end of the session. By Wednesday morning, MRVL was $285 billion company.
You don’t often see companies of this size increase their market cap by 50% in two days. That action is a function of lots of money chasing a stock that folks are reluctant to sell. Huge demand + limited supply = big rally.
Of course, it works the other way too.
Once all that demand has been soaked up, and then something happens that gives investors a reason to sell, the price comes down just as fast.
That’s why parabolic moves are sooooooo dangerous.
Here’s a good example of one…
Shares of Avis (CAR) went parabolic starting in early April. The stock rallied from $150 per share to $750 in just over two weeks – in a nearly straight up move. CAR is a tightly held stock – most of the company is owned by two entities – so there’s limited supply. And, as the stock rallied, more and more speculators chased it higher.
Two weeks after that amazing blast higher, CAR was back down to $150.
The thing is… CAR was a $5 billion company when it started its parabolic move.
The market cap of MRVL was $192 billion yesterday morning. It takes A LOT of $$$ to keep that move going. And, right now, that $$$ is coming out of the weakest sectors/stocks.
In other words… the primary action among investors right now is to “sell low and buy high.”
It’s working for the time being. And, maybe it will keep working a while longer. But, it is not a longer-term strategy to build wealth in the stock market.
This is NOT a sustainable trend. Parabolic moves eventually end. And, when they do, they end badly.
If the ensuing decline occurs in just one stock – like an illiquid rental car company – the damage is relatively limited. Right now, though, we’re seeing parabolic moves occurring in multiple stocks across multiple sectors.
If you caught some of these moves – congratulations. You’re sitting on big gains in a short period of time.
Don’t be shy about taking profits. It’s a lot easier to sell stocks into an onslaught of buying pressure. It’s a lot harder to sell when everyone else is rushing for the exits.
Best regards and good trading,
Jeff Clark
Editor, Market Minute