NVIDIA’s Stock Split and Potential Correction
When Nvidia (NVDA) opens on Monday, it will have experienced a 10:1 split, and we should remember that one of the purposes of stock splits is to facilitate distribution. That is to say that the lower price after the split attracts investors who avoided the stock at the higher price (i.e. the little guys). Over the years we have observed that stock splits frequently are followed by price corrections; however, Adam Johnson of The Bullseye American Ingenuity Fund on Fox Business quoted a Bank of America study stating that stocks that have a 5:1 split or greater are on average higher by 25% in the following 12 months, as opposed to the rest of the market being up only 12% in the same period. That may be true, but but a correction could also be in the cards as well.
The problem with NVDA is that it has advanced about 1100% since the 2022 low in an excruciating parabolic arc, and we expect that parabolics will eventually enter a correction. In the case of average companies, the correction can be quite brutal, -50% or more. But NVDA is currently one of the best companies ever, and if a correction comes, we would expect a high-level consolidation, which is a sideways trading range. We can see an example of this after the vertical advance at the beginning of the year, when NVDA corrected about -22% in March and April. There was another consolidation in 2023 involving a pullback of -25%. And finally, there was a -69% correction in 2021-2022, back before the magic of AI took hold.
Conclusion: Vertical advances beg for correction. In the case of a quality stock like NVDA, all that is usually needed is a relatively small pullback or consolidation. That is what we should be looking for sooner or later this year, and there seems to be good support at 970.00 . . . oh, wait. That will be 97.00 on Monday.
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