In a recent development, inflation growth remained stagnant at 0.0% last month, signaling concerns about the state of the economy. Coupled with dropping interest rates, some investors view this as a bullish sign for stocks, while others recognize it as a clear indication of a drastic economic slowdown that could impact AI spending. As fears of a rough period ahead loom, one key indicator, the Chicago PMI index, paints an intimidating picture. In May, the index dropped to 35.4, significantly below expectations of 41.1, resembling levels seen during the Great Financial Crisis and the Covid-19 crisis.

Analysts suggest that this economic deterioration may serve as the canary in the coal mine for the potential burst of the AI bubble. While external observers may not have a clear view of how demand is evolving in the sector, insider trading activity sheds light on how company management is reacting to underlying trends. Alarming data reveals that insider sales in Nvidia reached a record-high of $319 million in June, surpassing previous highs seen in March and December 2021, both of which preceded significant market declines.

Notably, director Coxe Tench's selling activity in Nvidia has caught the attention of market watchers due to his successful track record over the past two decades. Tench has already sold shares worth $289 million this year alone. This trend extends beyond Nvidia, as other AI semiconductor companies, including Dell Technologies (DELL) with CEO Michael Dell selling shares worth a staggering $2.1 billion in 2024, and Applied Materials (AMAT) with CEO Gary E Dickerson offloading $98.6 million worth of shares, are also witnessing increased insider selling.

The focus now shifts to Nvidia's highly anticipated 10-for-1 stock split, which has generated significant hype in recent times. Stock splits are generally viewed as positive drivers for stock prices, making them more affordable for smaller investors. Empirical research has shown that, on average, stocks perform well one year after a split. However, historical data reveals a mixed outcome for Nvidia, with two out of four past instances leading to substantial stock declines of over -60% within a year.

As the stock split fuels further speculation and inflates the perceived bubble, the potential downside risk appears to widen. Short-sellers may find this development particularly advantageous. However, experts caution that timing the peak of a bubble collapse can be challenging, especially during the initial phase when option premiums are inflated due to abnormal implied volatility.

Nonetheless, one analyst has taken a calculated risk by purchasing $105 July 19 puts on Nvidia, anticipating a drop to $95 in July, which could result in significant returns if realized. This short-term strategy aligns with a broader outlook of an impending second phase of the downturn, characterized by a slower decline driven by disappointing actual numbers. In this phase, the decline in stock value for Nvidia could be substantial, potentially dropping from approximately $110 to less than $30 within a year.

Despite the anticipated downturn, proponents of Nvidia's long-term fundamentals may view this as an opportunity to enter the market at a more favorable price point. For this particular analyst, a price below $40 serves as a trigger to consider building a long position again.

Observing Nvidia's behavior throughout the weeks, analysts have drawn parallels between its movement and Cisco during the Dot-Com bubble, attributing this to similarities in fundamental stories and investors' behavioral patterns. Recent macroeconomic deterioration, increased insider selling, and the underwhelming performance of stock prices add to the growing sentiment that Nvidia may have reached a historic peak, signaling a potential significant drop moving forward.

Investors are advised to exercise caution and consider the potential risks associated with the AI sector, particularly as it enters a period of economic uncertainty. As the bubble enters its second phase of decline, experienced investors may find opportunities for short positions with more favorable risk/reward ratios.