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For one, valuations have gotten a bit frothy. Two, a recent report from MIT said that about 95% of company generative AI pilot programs resulted in “little to no measurable impact,” on revenue or profits, as highlighted by Fortune.com. Three, OpenAI CEO Sam Altman says AI is in a bubble, but he’s still ready to aggressively spend on Ai infrastructure.
But AI isn’t going away. It’s just taking a breather.
In fact, according to Wedbush analyst Dan Ives, the party is far from over.
“Ives said that, although some names in the AI sphere — such as OpenAI CEO Sam Altman — have warned of overexuberance from investors about the technology, in his view, ‘the AI party ... started at 9pm. It’s now 10pm. That party goes to 4am,’” as quoted by CNBC.
With that, Ives still believes tech heavyweights, such as Microsoft, Amazon, Google, Nvidia, Tesla, and Meta will be some of the top standout winners.
And we have to consider that some of the biggest companies in the world are spending more.
Alphabet just announced it will boost its capital-expenditure forecast for the year to $85 billion from $75 billion. Even better, Meta, Amazon, Alphabet, and Microsoft intend to spend about $320 billion on AI technologies and data centers this year, as compared to the $230 billion capex in 2024. Plus, as noted by UBS, AI capex is expected to explode even higher, potentially reaching hundreds of billions of dollars a year.
So, what’s the best way to trade the AI pullback?
Here are three ways.
Advanced Micro Devices (AMD)
AMD continues to be a standout stock for the AI boom.
Since April, AMD ran from a low of about $80 to a recent high of $186.65.
Now back to $163.71, it’s still challenging Nvidia for chip dominance. Helping, the company is exposed to a multi-billion-dollar addressable market for data center AI chips. In fact, according to company Chair and CEO Lisa Su, that addressable market for AI chips will reach $500 billion by 2028, which is up from her prior estimate for $400 billion by the time 2027 rolls around.
As a supplement to the long term trend following approach of the Turtles, I also look at many shorter term indicators. Of everything I’ve examined in the past (and I’ve sifted through a lot of stuff), I personally think that Market Profile is one of the best tools ever developed to help explain market behavior and price movements. I will try to teach some of the ways you can use the Profile to help your trading as well. But, before getting started, let it be said that Market Profile is not a ‘system’ only a tool. It is only as good as the interpretation of the user (that’s you). And like Turtle Trading, you first have to know what you are looking for, and then figure out what it means.
The Market Profile is basically a bell shaped price distribution curve, with prices on the vertical axis, and volume, as a substitute for time, on the horizontal axis. The graph is broke up into half hour time periods, each represented by a sequential letter of the alphabet, according to the way floor traders keep their trading cards in the pit. In this example of the S&P, the letter ‘B’ shows all prices that were traded between 9:30am EST and 10:00am, while ‘C’ shows the range between 10:00am to 10:30am, etc. When you put it all together, you can se a picture of where prices have been during the day. The first thing that should be obvious to even the inexperienced eye is that the market basically went up all day long. This is evident by each successive half hour range being higher than the previous one. The hard part is knowing what to do with this information. Be patient… it’s coming.
The most basic tenet of Profiles is that where most of the trading takes place is considered to be the fair value area for the market. This acceptance of fair prices is characterized by the ‘fat’ part of the bell shaped curve, statistically known as the first standard deviation. It is where approximately two thirds of the volume area under the curve lies, in this case where two thirds of the trading takes place for the day.
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