A Routine Bounce Is Only the First Step
Chips are leading the snapback, but breadth is thin, and a durable low still needs a test that holds.
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We have some bounce action Friday, which isn’t a big surprise given the intensity of the selling this week. Semiconductors led the decline, and they are leading the bounce, with the VanEck Semiconductor ETF (SMH) up about 6%. The S&P 500 is up about 1%, and the Dow Jones Industrial Average has recovered from a weak open and is close to flat.
Breadth is the weak spot. It is running only about 51% positive, which is thin for a bounce off a selloff this intense. New lows are much better, at fewer than 200, but this is a routine bounce that lacks energy, and the uneven action shows that rotation is still a major theme.
The economic news is helping. The October jobs report showed 165,000 jobs added, above all forecasts, and the University of Michigan’s consumer sentiment survey was also solid. Normally, data like that would raise worries about inflation and a December rate hike, but bonds have hardly moved. Instead of adding to the pressure, the economic news appears to be shoring up sentiment that was hurt by the market action this week. A strong economy also tells us this week’s selling was about AI valuations, not a recession, and that is an easier problem for the market to work through.
Is the Worst Over?
The big question is whether the worst is over for the semiconductors and the rest of tech. The answer is maybe. A bounce is only the first step in producing a durable low. Ideally, that low is tested and holds.
The least likely scenario is a straight move up, but we have seen more V-shaped recoveries in recent years. I attribute that to ETFs and algorithms, which often work well when they operate contrary to conventional wisdom. So I won’t rule it out, but I’m not going to bet on it.
Bounces Versus Trends
From my viewpoint, Friday’s action is the first step in chart development. Traders with short-term time frames may like to play oversold bounces, but I focus on trend trades that last days and weeks, so my entry points are different from those of someone looking for a quick flip.
I want to see clear support, not just a one-day drop and reversal. If that support holds, I’ll build positions and use the lows as my stop. I’ll have more on this approach in my weekend column.
I’m heading to the Michigan State-Michigan football game in Ann Arbor this weekend. Have a great weekend. I’ll see you on Monday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
