Hey everybody, Tom here.
I get a lot of questions and emails from my readers asking about the best way to trade the AI revolution. It’s one of the most important topics of the summer… one I’ve talked about extensively.
Everyone wants a piece of the AI action, and market experts are predicting that this will be the fastest creation of wealth in history.
But NVDA trades at more than $455 per share! To get into 100 shares of the company leading the AI revolution would cost more than $45,000 — far more than the average trader can afford.
And it’s not just NVDA; most artificial intelligence stocks are too expensive for the average American investor to buy right now.
So what the heck are investors supposed to do?
One of my long-time colleagues, Chris Johnson, has his finger on the pulse of this industry, so I asked him to share how he’s trading this event.
I’ll let him take it from here. More from me tomorrow.
Tom
Mark Twain once said that history never repeats itself, but it does often rhyme.
There are several periods in the market’s history that have followed this saying to a T.
And whenever it happens, there’s always an opportunity to profit.
Believe it or not, the years 1634 through 1636 are singing in perfect harmony with the current trends in Artificial Intelligence (AI). That’s right, AI stocks are following a pattern that dates back almost 400 years.
That pattern will provide prepared investors with what may be the last opportunity to grab AI stocks before they make their real move.
That’s right, I said real move. Because the move we’ve already seen ain’t nothing compared to what’s coming…
Microsoft shares are up 40% this year. But there’s more.
Alphabet shares are trading 50% higher for the year, but there’s more.
NVIDIA shares are up more than 200% this year. But there’s more, a lot more.
There’s more because of what tulip bulbs did almost 400 years ago.
Here’s the chart. You may have seen it before, maybe not. But this is the pattern that all innovation-driven bubbles follow.
Tulipmania – as it is referred to as – is considered one of the most famous market bubbles.
The factors that drove the Dutch Tulip Market Bubble are the same that drove the dot-com bubble and then the 2007 housing bubble.
They’re the same factors that are now building the AI Bubble.
Investor sentiment and psychology is at the heart of the pattern. That sentiment is fed by the evolution of this technology and its adoption into the marketplace and economy.
That’s the reason that this pattern hasn’t changed after almost 400 years. You can’t change the psychology of investors. It’s coded into our “trading minds.”
Here’s the chart of NVIDIA (NVDA) following that same pattern.
So far, two of the more notable “phases” of the rally have played out — the “Awareness Phase” and the “Media Attention Phase.”
The media attention phase is one of what I refer to as the “tipping points” for a stock (or market), as this is when the average investor is made aware of an innovation and the opportunity to invest in its future. In other words, this is where “the crowd” starts to take notice.
We’ve seen that play out perfectly over the past year. Everything from headlines in the media to tracking how many times the term “AI” is mentioned in an earnings conference call (chart below).
And then there are the media mentions.
This media attention has put AI on the average investor’s radar, driving prices to their second of three peaks.
According to history, the next move will be lower, and that’s where the real opportunity will present itself.
Follow me on this, because it leads to that opportunity I’m talking about.
We’re hearing rumbles of a bubble in AI as the media compares the recent rally to what we saw in the late 1990s, when the dot-com bubble was being inflated.
What they don’t recall — or report — is that there was the exact same pattern then.
We’ll use Intel (INTC) as the example as it was the king of semiconductor companies during that cycle in the market.
Note the Awareness and Media Attention phases in this chart. They match the same patterns we saw in the Tulipmania chart.
The Tulipmania chart saw a 40% decline after the Media Attention phase.
The dot-com Media Attention phase was followed by a selloff that dropped Intel’s share value by 35%. That top occurred a full 18 months before the dot-com bubble burst.
That 35% pullback was the last opportunity to take part in the dot-com rally and walk away with epic returns. I know, because that’s exactly what I did.
After that 35% pullback — the last real opportunity to make bank in the dot-com rally — Intel went on to rally 300% before the bubble burst.
Apple (AAPL) shot 350% higher.
Cisco (CSCO) shares ran up 200% over the same period.
Hewlett Packard (HPQ) gained 175%.
And Microsoft (MSFT) climbed 150%.
And now we have a chance to capitalize as this historical pattern gets ready to emerge once again. Here’s the way I see things playing out over the next two years…
First… yes, we are going to see a deep pullback in AI stocks sometime in the next six months.
The media attention that has been showered on these stocks has done exactly what it did for tulip bulbs and semiconductor stocks — driven the market’s excitement to a short-term top.
The next phase will include doubts over AI, a focus on regulatory activity, and profit taking.
These are the same types of hurdles that previous innovation rallies have faced… and the effect will likely be the same — a 20%-50% drop in AI stocks.
But don’t dismay, because this is exactly what we want. This is when we get ready to strike.
In fact, on the most recent monthly call for my Long-Term Equity Profit service, a subscriber asked why I still hadn’t added NVIDIA — the biggest AI stock of them all — to my portfolio.
The reason is simple. I’m waiting for that drop.
The Media Attention phase is waning, which suggests that we’re going to see a 20%-50% pullback in NVDA (and other AI stocks, of course).
I’ll strike at that opportunity, as history tells us that it will be the last stop for AI stocks before they make their historic blowout move to the real “bubble top.”
Here’s the chart of NVIDIA again, this time with my current pullback and entry targets.
Long story short, once NVDA breaks below $425, I expect to see increased selling as panicked investors get shaken out of this overly crowded trade.
From there, the stock will search for technical support. Based on my analysis, I believe that level will be $375. That represents a discount of 25% off NVDA’s all-time highs, which would be a significant “sale.” This is where we’ll see the first round of buying from the crowd. This is also right around previous resistance.
That’s where I will make my first — and heaviest — round of long-term buying, leveraging the move with Long-Term Equity Anticipation Securities, commonly referred to as LEAPs.
This approach will allow me to take my position with less capital while still affording my portfolio the flexibility and the opportunity to profit 10X or more over holding the shares themselves.
It’s a cool approach, and one that I love for not only NVDA, but all AI stocks.
Finally, I will use the same strategy to lower my costs on the stock even more should NVIDIA shares fall to my next technical level of $325.
I see this as the Maginot Line for NVIDIA stock and frankly, would be an eager buyer if that price were to grace my watchlist screen.
That’s it; the history of the market’s very predictable pattern and how I’m using it to get ready for what may be the biggest personal allocation into the hotter-than-hot AI sector.
The pattern matches up with about 10 other stocks associated with AI, so I’m looking at a target rich environment to develop over the next six months.
Check back with me as I monitor each and every one of these stocks for that once-in-a-decade opportunity.
Or better yet, join me. Just click here to see how it works!
As always, I wish you the best trading success!
CJ
