Technically, NVIDIA Is a Sell

Technically, you should sell NVIDIA (Nasdaq: NVDA) right now.

We examined the company using Moving Average Convergence-Divergence (MACD), which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

Signal line crossover is one of the more common ways to interpret MACD. It uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below you can find a current chart of NVIDIA's MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simple as a Moving Average Convergence-Divergence chart! OK, we're jesting -- but in all seriousness, this is actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 17 times in one year!

A better way to size up companies
Here at Fool.com, we're more interested in other measures of company value. When we look at NVIDIA and its peers, here are the areas that interest us:

Sources: Yahoo! Finance and Capital IQ, a division of Standard and Poor's; yoy = year over year; TTM = trailing 12 months.

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity as well as qualitative values like competitive advantage and managerial effectiveness. These areas led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best solution for individual investors to build lasting wealth and achieve their financial goals.

So when you look at NVIDIA, don't evaluate it for crossing a momentum line. Buy or sell it because:

• NVIDIA has led the graphics card space for years, but has faced recent ominous signs. Competitor AMD recently moved ahead of the company in market share and is increasingly competitive in high-end chips, where NVIDIA has managed to generate outsized profits in recent years.
• Another ominous sign for NVIDIA is its lack of success in selling its mobile Tegra processor. When NVIDIA announced the chip, there was a lot of chest-thumping around the massive opportunity the chip would present for the company. However, NVIDIA failed to realize how difficult it is to break into the mobile microprocessor market. Since NVIDIA announced its processor, competitors Texas Instruments and Qualcomm have roundly beaten NVIDIA on major contracts. Tegra might be best suited to tablets, but is still awaiting companies producing viable designs that can effectively compete with Apple's iPad.
• On the plus side, NVIDIA has a pristine balance sheet. The company has nearly one-third of its market capitalization in cash and continues to be a leader in the highly lucrative high-end graphics card segment. Also, the company has released recent cards that have received outstanding critical praise, illustrating that NVIDIA's focus is once again on dominating its bread-and-butter graphics card niche.

Want to sell NVIDIA based on technical merits today? Technically, odds are that you should flip and buy NVIDIA sometime very soon. If that sounds like madness to you, well, we here at Fool.com agree. In every market decline, technical analysis gets its share of proponents. The cries that "buy and hold is dead!" get louder, and individuals race toward schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time, most technical analysis schemes are a relatively simple science, eliminating the vast complexities of evaluating true company value. However attractive, this theory is ultimately the wrong path for individual investors. Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

However, with as much as 75% of market trading now done by Ph.D.-level programmers at massive high-frequency funds, even if opportunities existed, what chance would an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to Massey University's study across 49 countries, which showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier: NVIDIA crossed the crossover 17 times in the past year! While traders might not buy and sell with each crossing, cases of high momentum are normally short-lived. The amount of trading in most technical analysis schemes racks up commission fees and short-term capital gains taxes, eating away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time.

That's why, at Fool.com, we recommend that individual investors establish a portfolio of well-managed companies with strong advantages over their competitors. In the end, we find that to be the best contributor to long-term wealth. More importantly, it'll spare you from sitting bleary-eyed in front of a computer with a Big Gulp full of coffee, frantically buying in and out of companies. But hey, if your idea of protecting your future is charting the ups and downs of Moving Average Convergence-Divergence charts, then NVIDIA looks like a sell right now.