Resurgence In AI Sentiment Brings Both Opportunity And Risk For Direxion's Nvidia-Focused NVDU, NVDD ETFs

Although semiconductor juggernaut Nvidia Corp. (NASDAQ:NVDA) has become practically synonymous with the dramatic rise in artificial intelligence, the tremendous success also serves as a point of caution. True, NVDA stock has skyrocketed in recent years on the back of its graphics processors, which power the latest AI workloads. At the same time, the market’s non-linearity imposes corrective spells when fundamentals get out of sync.

At first glance, circumstances appear rather auspicious for NVDA stock. Since the start of the year, the security has gained nearly 41%. Over the trailing five years, it has stormed to a return of almost 1,357%. If the technical performance alone wasn’t convincing enough, the financial performances help underscore the dominance. Indeed, Nvidia hasn’t missed on both the top and bottom lines since August 2022.

To be sure, NVDA stock isn’t impervious to negative sentiment. Until recently, the security was trending negatively in the trailing month — a perspective that has flipped due to a roughly 8% move in the past five sessions. It’s possible that NVDA represents a beneficiary of the so-called Santa Claus rally, a seasonal phenomenon that tends to bolster certain equities in late December to early January.

Generally speaking, this ascending wave tends to favor equities associated with established blue-chip giants and not necessarily hot, cyclical tech names. Still, certain exchange-traded funds that track the Magnificent Seven — which includes NVDA stock — have witnessed investor inflows. Still, despite the positive action, not everything is aligned favorably for Nvidia.

One of the biggest concerns dogging NVDA stock is its valuation. To be fully upfront, valuation represents a tricky subject because there is no universal truth claim that forbids securities from printing too rich a ratio lest they reflexively stumble. However, it’s also true that investors frequently monitor the premiums they are paying — and that may lead to hesitation.

For example, Nvidia’s last eight quarterly reports featured revenue surprises against analysts’ targets that landed “only” in single-digit territory as opposed to double digits in past disclosures. As such, investors may question the wisdom of holding onto a security that is priced at nearly 25 times trailing-year sales.

On the technical front, NVDA stock is still down roughly 7% since the close of Halloween. This comparative red ink may demonstrate how difficult it is for a leading tech giant to sustain, let alone expand, its supremacy.

The Direxion ETFs: Nevertheless, despite the raging debate, it’s worth pointing out that traders can look at the same data and come to different conclusions. In that spirit, financial services provider Direxion offers two countervailing exchange-traded funds that allow market participants to take directional positions on Nvidia.

For the optimists, the Direxion Daily NVDA Bull 2X Shares (NASDAQ:NVDU) tracks 200% of the daily performance of NVDA stock. On the other end, skeptics may consider the Direxion Daily NVDA Bear 1X Shares (NASDAQ:NVDD), which seeks 100% of the inverse performance of the namesake security.

A key similarity that runs through Direxion ETFs is flexibility. Usually, traders interested in leveraged or short positions must engage the options market. However, financial derivatives carry complexities that may not be suitable for all investors. In contrast, Direxion ETFs can be bought and sold much like any other publicly traded security, thus mitigating the learning curve.

Still, traders targeting these funds must recognize their unique risk profile. First, leveraged and inverse ETFs typically exhibit greater volatility than standard funds tracking benchmark indices, such as the Nasdaq Composite index. Second, Direxion ETFs are designed for exposure lasting no longer than one day. Holding these ETFs longer than recommended may expose traders to value decay due to the daily compounding effect.

The NVDU ETF: Since the start of the year, the Direxion Daily NVDA Bull 2X Shares has gained just under 30%. In the trailing six months, NVDU is up roughly 40%.

• At present, the NVDU ETF is trading above its 20-day exponential moving average. Interestingly, though, it has run into upside resistance at the 50 DMA, presenting a near-term challenge.
• Acquisition volume has noticeably faded since May of this year. However, it’s also fair to note that volume levels have been relatively stable during the fourth (calendar) quarter.

The NVDD ETF: Aligning with expectations, the Direxion Daily NVDA Bear 1X Shares has performed poorly this year, down about 42%. In the past six months, it has lost more than 24% of value.

• Unfortunately, while the NVDD ETF was trending above its 20-day EMA and the 50 DMA, the latest price action has seen the fund drop below both averages.
• Another concern about NVDD centers on volume, with the level of acquisitions being prominent in the late summer. Now, buyer interest has faded, presenting viability challenges.

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