2 Types of Rotation Are Driving This Market
The semiconductor sector is under pressure again Tuesday morning following Samsung Electronics’ earnings news.
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Overnight, Samsung, based in Korea, projected a 19-fold increase in second-quarter operating profit. This “good” news triggered a sharp drop in Samsung shares, and the Kospi closed down nearly 5% overnight. Micron Technology (MU), SanDisk (SNDK), and Western Digital (WDC) are all lower in U.S. premarket trading.
But the bad news for chips is turning out to be good news for hyperscalers Tuesday morning. The Roundhill Magnificent Seven ETF (MAGS) is trading higher on the belief that intense competition in the chip sector and the huge investments in memory production will lead to lower prices. That will ease some margin pressure on the hyperscalers who have been absorbing the costs.
Two Types of Rotation Are Driving the Action
The story of the market remains rotation, but there are now two distinct types operating.
The first is sector rotation. Money is moving from the AI-related names into sectors that have their own catalysts. Biotechnology has been ripping higher. The iShares Biotechnology ETF (IBB) is up 14 of the last 17 sessions. The group is looking extended, but positive stock-specific news continues to provide fuel. Consumer staples, financials, healthcare, and industrials have all had periods of leadership through June.
The second is index rotation. The changes to various index compositions have added a mechanical component to the rotational action. The Nasdaq 100 rebalancing is in play Tuesday with SpaceX (SPCX) joining the index before the open, which is the last major event in the sequence. The Russell reconstitution happened last month. The S&P 500 had its quarterly changes.
The index rotation dynamic is largely over now. There will be some reverberations over the next several sessions as positioning normalizes but the major mechanical events are behind us. The sector rotation is now the story to watch.
Strategy
My strategy has been working well through this environment and I am staying with it:
- High cash levels around 50%.
- Tight trade management on existing positions.
- Overweight biotechnology.
- Looking for shorter-term technical setups to trade rather than building larger longer-term positions in a market where the rotation is producing frequent moves.
My longer-term approach is to start positioning for the upcoming earnings reports. I am tracking a list of names with anticipated earnings dates and watching for chart development ahead of the specific catalysts. Q2 earnings season starts a week from now with the banks on July 14 and big tech follows the week of July 20.
The volatility in chip and mega-cap tech has been beneficial for trading in the rotation groups rather than damaging. When the money moves out of the AI names, it has to go somewhere, and the groups that have been receiving that flow have provided a range of opportunities.
Oil is higher Tuesday morning after Iran’s Revolutionary Guard fired at commercial ships near the Strait of Hormuz overnight. The Iran situation has moved from de-escalation back into escalation. The FOMC minutes release Wednesday at 2 PM ET and will provide the first look at the internal Fed discussion behind Kevin Warsh’s hawkish first meeting.
At the time of publication, Rev Shark had no positions in any securities mentioned.
