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  • Writer's pictureRealFacts Editorial Team

Nvidia Stock Sells-Off, Why Semiconductors May Be Weak

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This week the Magnificent seven lost $950 billion in market capitalization, this was the largest single week loss for the group ever. This drop was mostly led by a huge selloff in the market-leading Nvidia stock, losing about $300 billion of that market cap itself. This was the second-worst daily market cap loss of an U.S. company ever.

The decline in Nvidia stock is mostly due to a sort of sector rotation. The semiconductor sector, of which Nvidia is the leader, has been an absolute monster recently, returning far greater gains than the market itself. This however must come to an end eventually, many analysts think that that time may be soon. Jordan Klein, an analyst at Mizuho said, “sort of an unwind of the entire sector” that’s been “accelerating day by day.” Researchers at Harvard and the University of Hong Kong came together and wrote a paper about the link between a sector’s alpha (how much it beats the market indexes by) and the likelihood of its subsequent crash. Mark Hulbert of MarketWatch wrote the following about this paper and the chart below, “The accompanying chart shows that this probability grows along with an industry’s market-adjusted performance (its “alpha”). The unconditional probability of a crash is 14%, growing to 20% when that alpha is 50 percentage points. When the alpha is 100 percentage points, the probability grows to 53%. With the S&P 500 Semiconductors & Semiconductor Equipment Industry Group Index, its two-year alpha is 91 percentage points (according to FactSet data )— implying that the odds of it crashing are almost exactly 50:50.”

Graph of Nvidia crash probability

This phenomena may be the reason for the struggling with Nvidia and other semiconductor stocks. Semiconductors have been crushing relative to the overall market in recent years and the probability of a crash, defined as “a drop of at least 40%” is heightened. Now, just because probabilities are high that doesn’t mean a crash will happen. When investing in the market it's important to keep in mind that you’re always dealing in probabilities, so it's important to stay informed and to manage your risk effectively.

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