OVERVIEW
Nvidia Under Attack: Antitrust Investigation Launched

The pre-market today is buzzing with major updates, but the spotlight is firmly on Nvidia, the AI and semiconductor powerhouse. A company with a market value surpassing the GDPs of the UK, France, and Germany, Nvidia has been a darling of the U.S. AI revolution, driving innovation in semiconductor technology. But now, it faces significant headwinds in the form of a regulatory crackdown from China.

China’s State Administration for Market Regulation (SAMR) has opened an antitrust investigation into Nvidia, targeting its $6.9 billion acquisition of Mellanox Technologies, a deal completed in 2020. This move signals rising scrutiny of dominant players in the semiconductor space and adds another layer of complexity to the ongoing U.S.-China tech trade war.

This probe couldn’t come at a more challenging time for Nvidia. The U.S. and China have been engaged in an escalating trade battle, particularly in the high-tech sector. Just last month, the Biden administration imposed its third round of export restrictions on advanced semiconductors bound for China, citing national security concerns. These restrictions aim to limit China’s access to cutting-edge AI technologies and computing power that could have military applications.

China has responded by urging domestic companies to avoid U.S.-made chips, branding them as "no longer safe" amid the geopolitical climate. This tit-for-tat has left Nvidia navigating treacherous waters, as China accounts for roughly 10% of its total revenue—a significant share for a company of its size.

Nvidia has worked to adapt to these challenges. It has redesigned several chips specifically for the China market, ensuring compliance with U.S. export restrictions while maintaining its foothold in the world’s second-largest economy. CEO Jensen Huang has reiterated the company’s commitment to aligning with U.S. trade policies, no matter how they evolve.

The implications of China’s antitrust probe could be far-reaching. While Nvidia is no stranger to regulatory challenges—having successfully navigated global reviews during its Mellanox acquisition and other transactions—this investigation arrives amid heightened scrutiny of U.S. tech giants in international markets.

If Nvidia were to face penalties or restrictions from the Chinese market, the fallout could extend beyond its bottom line. It might also ripple through the global semiconductor supply chain, impacting other U.S. companies dependent on China as a key market.

The ongoing antitrust investigation into Nvidia by China could put significant downward pressure on major capitalization-weighted indices in the U.S. equities market, such as the QQQ and SPY. As Nvidia is a major component of these indices, any regulatory setbacks could weigh heavily on their performance.

This could act as an anchor, dragging down not only the tech sector but also smaller companies that are caught in the crossfire of the escalating U.S.-China tech conflict. The ripple effects could be felt across the broader market, especially as investor sentiment remains sensitive to geopolitical tensions.

Nasdaq

The Nasdaq continues to show impressive strength, with the QQQ pushing higher following an intraday bull flag formation on Thursday. It broke out into the high $520s during Friday’s session, closing with strong relative volume to cap off an explosive week.

While there’s potential for some short-term weakness if Nvidia (NVDA) faces significant pressure, it’s important to note that other megacap stocks like Google (GOOG), Amazon (AMZN), Microsoft (MSFT), and Tesla (TSLA) are performing exceptionally well. This broad strength among large-cap names should help support the QQQ, even in the face of any Nvidia-related pullbacks.

Looking ahead to this week, we remain optimistic about the QQQ. The strength shown on Friday was notable, and with many of the major tech stocks that comprise the large-cap tech index breaking higher and making explosive moves, large-cap tech remains our highest-confidence sector in the U.S. equities market.

S&P Midcap 400

Midcaps have continued to consolidate and pause following their significant rally in mid to late November. The MDY has been holding its daily 10-EMA with low relative volume over the past three sessions, finding support around the $608 level. There’s a low-volume pocket on the Visible Range Volume Profile (VRVP) that extends down to the rising 20-EMA at about $604, which could be tested if the 10-EMA doesn’t hold this week.

When comparing the performance of the MDY to the QQQ, it’s clear that the bulk of market strength is currently concentrated in the large-cap and megacap stocks, with a noticeable rotation away from midcaps.

Russell 2000

Small caps are showing similar consolidation patterns, with the IWM falling below its Point of Control (POC) level at $240 and finding support at the daily 10-EMA. The Russell 2000 is essentially sandwiched between dense overhead supply at its POC and robust demand from the $238-$236 range, which could attract some buyer interest, especially considering the current market environment.

With rising consumer spending driven by seasonal strength during the holiday season and the continued positive sentiment surrounding growth plans from the previous administration, combined with ongoing interest rate cuts, the small caps may see more aggressive buying in the near term.

DAILY FOCUS
China Entering a Secular Bull Market

As we head into today’s trading session, we’re seeing a strong pre-market rally in several leading China-related stocks. This comes after China’s first shift in monetary policy in 14 years, with the government moving from a “prudent” to a “moderately loose” stance. This shift signals a more aggressive approach to stimulating the economy, especially in light of the ongoing deflationary pressures and slow consumer spending.

This change in policy has sparked optimism, particularly among investors in sectors like technology, consumer goods, and infrastructure, as they anticipate that the government’s new measures will boost domestic consumption and drive economic growth. With the Chinese government now prioritizing fiscal and monetary measures to revive the economy, companies poised to benefit from this stimulus are rallying.

In particular, we’re seeing major players in China’s tech and consumer sectors seeing significant pre-market gains. The prospect of increased government spending and improved economic sentiment has led to increased investor interest. For traders, this presents an opportunity to focus on which China-related stocks are best positioned to benefit from this historic policy shift. Keep an eye on these stocks, as they could offer valuable short-term opportunities as China’s economic landscape evolves.

WATCHLIST
Focus On These On A Strong Reaction

ATAT: Atour Lifestyle Holdings Limited

• ATAT is currently standing out as the best-performing China-related stock in the market today, and for good reason. From a technical perspective, it boasts an exceptional level of linearity, which is a rare and highly desirable trait in the trading world. The stock exhibits price action that is both predictable and trader-friendly, consistently respecting the rising 10- and 20-day exponential moving averages (EMAs). This kind of price behavior is a clear signal of strength, and it’s something many traders look for when assessing potential opportunities.

• But ATAT’s appeal goes beyond just technicals. It’s positioned within one of the most robust industry themes both in China and globally, particularly in the consumer services sector. This gives it a unique advantage, as the company operates in a space with significant growth potential.

• On the fundamental side, ATAT has been delivering impressive growth numbers. In 2023, it saw a revenue increase of over 100%, with gross profit jumping by 156%. The company’s operating income surged by an extraordinary 485%. These metrics indicate that ATAT is not only growing at a rapid pace but is also expanding its profitability in a way that outpaces many of its competitors.

XPEV: XPeng Inc.

• XPEV, or XPeng, Inc., is a prominent player in the smart electric vehicle (EV) market in China, where it designs, develops, manufactures, and markets cutting-edge electric vehicles. But what sets XPEV apart is that it operates within a broader, high-growth industry theme—not just within China’s EV space but also in the larger robotics and automation sectors, which are key drivers of future innovation.

• XPEV is a stock we've been closely monitoring due to its impressive daily volatility, particularly its high average daily range (ADR%). This volatility makes it an explosive stock, presenting significant potential for traders looking for dynamic price action and short-term opportunities.