A New Crop of Winners and Losers Is Emerging After a Major Political Shift
Rotation is still the story, but the election has changed its shape.
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The market is still sorting through the election’s reverberations. The challenge is figuring out whether the first moves will turn into strong momentum or whether we need a stretch of volatility before the charts develop.
Some strength was chased on Wednesday. However, the Invesco QQQ Trust (QQQ) faded as the day went on, while the Dow Jones Industrial Average held strong and is up again Thursday morning. QQQ is lower in early trading, while the iShares Russell 2000 ETF (IWM) is up, oil is slightly lower and bonds are inching higher.
How the Rotation Changed
Rotation has been the story for weeks. In October, the equal-weighted S&P 500 beat the cap-weighted index by the widest margin since 2009 as money moved out of AI stocks and into the laggards. The trade was simple: AI on one side, everything else on the other.
The election changed that. The split now runs within the AI group. Data center owners are winning, and the companies that supply and build them are losing. Amazon (AMZN) and Microsoft (MSFT) each rallied more than 6% on Wednesday. The Philadelphia Semiconductor Index (SOX) fell sharply, and the CoinShares Bitcoin Mining and Digital Power ETF (WGMI), which holds bitcoin miners that have pivoted to AI hosting, dropped about 9%.
According to Bespoke, only two other days have seen the Nasdaq rise at least 1% while the SOX fell as much as it did Wednesday: March 30, 2001, and July 22, 2008. The chip selling continued overnight after disappointing results from Qualcomm (QCOM) and Arm Holdings (ARM). South Korea’s market fell more than 5% and triggered a trading curb.
The bond market has a different read. The Wall Street Journal reports that bonds financing data-center construction rallied on Wednesday. So did the bonds of Nvidia (NVDA) and Broadcom (AVGO), even as their stocks fell.
Credit investors see a slower build-out as less risky, while stock investors see fewer chip orders. When the bonds rally and the stock falls, the stock is often the one that overreacted. That doesn’t make the chips a buy this morning, but it’s where the bounce buyers will be focused.
The other side of the rotation is the affordability trade. Nine of 11 S&P 500 sectors rose on Wednesday. Consumer discretionary, materials, real estate, financials and health care all gained 3% or more, while energy fell nearly 5% with oil.
Voters said they were angry about gas prices, tariffs and the cost of living, and money moved into the groups that benefit if relief arrives. No immediate policy will fix affordability, but the pressure to address it is now much greater.
Momentum or Volatility?
Small-caps gave back some of their early gains but still held up. The Russell 2000 gained 1.6% and retook its 50-day moving average, and it’s outperforming again Thursday morning. That’s the signal I said I need to see, and it has to hold for several days.
The problem is that the leadership is still shifting too fast for the charts to develop. Investor’s Business Daily cut its recommended exposure to 0% to 20% on Oct. 30 and raised it to 20% to 40% on Wednesday. IBD is looking for a follow-through day in the Nasdaq and S&P 500 to confirm a new uptrend, and with chips under pressure, the Nasdaq will have a hard time delivering one. When a timing model flips that quickly, it’s a sign the market will stay volatile, and that makes it hard to find good entry points.
The economic data could help with chart development. We have jobless claims and third-quarter productivity Thursday morning, and the October jobs report Friday. September payrolls rose only 29,000.
A soft wage number would ease the pressure for a December rate hike and help the small-caps. A hot one keeps the money in the mega-caps.
Precigen Beats, but Watch the Cash
Precigen (PGEN), which I discussed here, reported after the close Wednesday, and the numbers beat expectations. Revenue was $74.1 million against the $71.6 million consensus, sales of Papzimeos, its gene therapy for a rare airway disease, grew 37% from the second quarter, and the company turned cash-flow positive a quarter ahead of its own forecast.
The number I said I’d be watching still needs work. Receivables rose to $96.5 million from $71.9 million at the end of June, and operating cash flow was $11.9 million against net income of $35.8 million. Sales are coming in faster than the cash. The time it takes to collect hasn’t gotten worse, though. Receivables grew in line with sales, which is what you’d expect from a fast-growing drug that gets paid for months after it is used.
Game Plan
I expect more volatility before we get strong momentum. The election moved money quickly, and the first moves after a shock tend to get tested.
I’m watching whether the small-caps can hold their 50-day, whether the Dow leaders keep their gains as the chasing cools, and how earnings reports from Oscar Health (OSCR) and Xeris Biopharma (XERS) are received Thursday morning.
At the time of publication, Rev Shark was long AMZN, OSCR, XERS and PGEN.
