On the Margin Newsletter: What NVIDIA’s impressive run means for market breadth

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Welcome to the On the Margin Newsletter, brought to you by Felix Jauvin, Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:

• What NVDA’s impressive run means for market breadth.
• When and how BTC’s price could break out of its current range.
• The SEC has apparently ended its Ethereum investigation. But Consensys isn’t totally in the clear.

NVIDIA grinds higher in a world of dispersion

This week, NVIDIA became the world’s most valuable company, surpassing both Microsoft and Apple.

And let me tell you — some days I feel like I’m the only one who’s never bought or sold NVDA. I have no shame in saying I’ve missed the entire run. To those who have made generational gains and have the confidence to actually lock them in, I salute you.

This NVDA run is a good bellwether of an interesting dynamic going on in markets these days; the vast majority of the returns are coming from a few select stocks, and market breadth is very narrow.

As seen in the breadth index below, we are currently at 19 — whereas the 30-year average is at 35:

Another simple way of looking at this dispersion in breadth is comparing the S&P 500 Equal Weight index to the SPX Market Cap weighted index. Despite historically remaining somewhat in line, the market cap-focused index has been soaring higher while the one with an equal weight has flatlined:

This dynamic is making for one of the most interesting charts I’ve seen in a long time. Implied correlations between indexes and the stocks that make up those indexes is hitting an all-time low:

What does this all boil down to? That we are in a true stock pickers market right now. If you aren’t holding the handful of (mostly AI/tech narrative-driven) stocks that are actually hitting new all-time highs, you’re missing most of the rally. No one wants to own consumer staples these days; everyone wants to own the picks and shovels powering the AI revolution.

My theory on why there’s been such a lack of breadth in the market is two-fold:

Upward earnings revisions

There is a solid fundamental reason why the outsized returns are only coming in the mega-cap tech stocks: They’re the only companies seeing significant positive earnings revisions. As our world becomes increasingly more online and digital and less offline and “real,” it makes sense that it’s these few companies that are seeing most of the gains.

Liquidity constraints

The other slightly more bearish take is that with the Fed Funds Rate at the highest in decades and the cost of living increasing faster than wages, there’s simply less money available to pump up all stocks. Since most of this liquidity is brought into the market through a passive bid to index ETFs such as SPY and QQQ (which are market cap weighted), they are the only things that are really going anywhere.

The big question for me is whether this very narrow breadth is a sign of a top forming in equities, or whether the breadth will broaden out and we see it continue higher as other companies outside of the Mag7 join the party.

In a world of secularly higher inflation and higher fiscal deficits — and knowing that equities are a nominal asset (revenues go up when inflation goes up, due to price increases) — I tend to lean towards the rally continuing and broadening.

— Felix Jauvin

72

The percentage of “wealthy” Americans (with at least $3 million in investable assets) — aged 21 to 43 — who say “it is no longer possible to achieve above average investment returns by investing solely in traditional stocks and bonds.”

I guess none of them got in on NVDA early enough.

The statistic comes from Bank of America’s latest survey, which also found that 28% of that age group prefer crypto to traditional investments when it comes to growth opportunities. Only 4% of wealthy investors 44 or older said the same.

BTC’s game theory-fueled boost coming?

While some have gone on record predicting BTC could hit $100,000 by the end of the year, it appears patience will be key.

Crypto prices (obviously) don’t always go up, and you don’t have to look beyond this past month for evidence.

Bitcoin dipped below $65,000 again on Thursday. It was trading at roughly $64,980 at 2:15 pm ET — down 9% from a month ago.

While Galaxy Digital CEO Mike Novogratz was on the $100,000 BTC price prediction train earlier this month, he did note that sort of price rise in 2024 could be dependent on whether BTC transcends the $73,000 resistance level in the short-term.

That has not happened, and the Fed choosing to hold interest rates steady last week didn’t help.

Despite the $100K outlook, Novogratz also said earlier (in May) that a “consolidation phase” was possible — at least until rates come down, or the US election in November.

LMAX market strategist Joel Kruger said Thursday that BTC could remain in its current range for several more weeks, noting summer months “can often translate to apathetic conditions.”

Globe 3 Capital CIO Matt Lason believes BTC is primed to see a rally in the next month or two amid a forced liquidity increase caused by currency fluctuations or economic impacts of high interest rates.

He cited another reason too: game theory.

“There has been an increasing stream of corporations and pension funds adding bitcoin to their treasury,” Lason told Blockworks. “We feel this will not only continue but ramp up as other companies and pension funds look to keep pace with their competition.”

Game theory is also playing out with investment advisers that now have easier access to BTC via US spot ETFs, he noted.Spot ether ETFs are expected to launch sometime this summer.

“Some of the large firms still have yet to embrace bitcoin, but that is changing quickly,” Lason added. “As the old saying goes: ‘Slowly at first, then suddenly.’”

— Ben Strack

SEC (sort of) spares Consensys

The SEC has apparently opted against bringing charges against Consensys after its investigation into the Ethereum Foundation, the blockchain software company said Tuesday.

​​An SEC letter (which the agency failed to authenticate) indicates Consensys is in the clear after the end of the so-called Ethereum 2.0 probe that first came to light in April.

An SEC spokesperson told Blockworks the agency “does not comment on the existence or nonexistence of a possible investigation.”

The industry largely took the whole situation as a win. ETH gained as much as 3.6% on Wednesday after Consensys proudly posted: “Ethereum survives the SEC.”

There remains, of course, the matter of the Wells notice the SEC sent Consensys in April. It stated the agency planned to charge the company with securities violations involving its MetaMask wallet. An enforcement action has not yet been taken — at least not publicly — but is very much still on the table.

If you remember, Coinbase said it had received a Wells notice in the spring of 2023. The SEC filed charges against the exchange roughly 10 weeks later. Based on that timeline, Consensys could be sued in a matter of days.

We already know though that Consensys, like Coinbase, is ready for a fight. The company preemptively sued the regulator in April, alleging the SEC had overreached its authority and “unlawfully” attempted to regulate the crypto industry.

It’s clear the industry appreciates Consensys’ efforts, although we know no one envies its legal bills.

— Casey Wagner

Bulletin Board

• MicroStrategy revealed its buy of nearly 12,000 more bitcoin so far in the second quarter. The business intelligence firm’s BTC holdings (totaling 226,331) are now worth roughly $15 billion.
• Bitcoin mining giant Marathon has expanded its operations to another continent. Its pilot project in Finland aims to use heat from its datacenter in the country’s Satakunta region to heat a town of about 11,000 people.
• Amended registration statements, or S-1s, for the slate of planned US spot ether ETFs are expected to roll in by tomorrow. Fund group Bitwise, which submitted one Tuesday, also shared an ad poking fun at “Big Finance.”

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