Can Nvidia Stock Rally Forever?

This article will serve to clarify some of the unclear points I have made in the past few articles. It’s important to analyze how you can be wrong to avoid sticking to bad bets when the tide begins to turn. For example, if you’re bearish on oil, but know which factors could push it higher, you will cover your shorts when you see the factors you’ve researched playing out. This can save you money. In terms of clarifications, sometimes charts can be made to show a point which isn’t true. Once you find out something you thought to be true isn’t true because another set of data provides a new perspective, it’s best to change your mind right away and not hold on to faulty arguments.

One aspect which I may have been unclear on is Chinese inflation. I have mentioned the Chinese inflation surprise index has been cratering. That index is only a somewhat related derivative of the actual data. The actual inflation, as you can see from the chart below has been rising in the past few years. It looks like the non-food CPI growth rate is stagnating, but it would be wrong to say that Chinese inflation is decelerating. The reason for the decline in the surprise index is because commodity prices are falling and because the estimates have been overzealous.

The problem with surprise indexes is they don’t tell you the direction of the data. You would think if the data is disappointing, the analysts will lower their forecasts so they don’t miss by as much, but there’s no rule that says that must happen. The Citi macro surprise index isn’t correlated with the stock market and is only tangentially related to the economic reports themselves. Surprise indexes are a tool to discover how reports are doing versus consensus, but they don’t give you a summary of the economy or whatever metric it’s covering. This line of thinking was true with the chart I showed in a different article which compared the earnings beat rate to the stock market. They weren’t correlated. To be fair, that was less related to the actual data than these surprise indexes because there could be a case where the firms which are missing expectations are missing by a lot, while the firms which are beating estimates are barely beating. That example scenario is actually fairly reflective of reality most times as analysts set the bar slightly too low so most firms can beat estimates by a smidge.

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