A Shift in Market Character, Not a Collapse
Sustained upside is less likely from here, as rotation is starting to turn defensive.
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We have a small bounce developing Wednesday morning after three straight declines. This is partially due to President Trump pausing his threat of 50% tariffs on some Canadian products. The global bond rout has also abated for the moment, with the 30-year Treasury yield edging lower and borrowing costs in Europe and Japan easing.
None of that changes what appears to be happening underneath, however. We are seeing a shift in market character. That does not mean everything is about to collapse, but it does suggest that sustained upside moves are less likely from here.
The Bond Story Has a New Driver
The 30-year Treasury yield hit 5.337% on Tuesday, the highest intraday level since 2007, and Japanese long-dated yields ended the day at their highest since at least 2006. That is a global selloff rather than an American one, and Wall Street does not feel good about it.
The usual explanations are being stated: fiscal deficits, the Iran conflict and the inflation worry that comes with it, and the general level of government debt issuance. But there is another issue that has not received as much attention, and it is related to the trade that has been at the heart of the market action.
Technology companies have flooded the bond market with debt, and that supply has to be absorbed by the same funds that buy government paper. AI is now competing with the capital needs of nations.
This is the loop I wrote about Monday showing up in a different place. Chip pricing feeds inflation, inflation feeds yields, and now the financing of the buildout is pushing yields higher on its own, independent of what any central bank does.
IBD Cuts Exposure
Investor’s Business Daily downgraded its outlook Tuesday, taking recommended exposure to 60% to 80% from the maximum 80% to 100%. That is their first cut since the confirmed uptrend began on August 4, and it comes after two weeks of steady increases in exposure.
Their reasoning was mechanical. The Nasdaq composite fell 1.3% Tuesday for a third straight decline, the longest losing streak since late July, and slipped below a recent short-term high, which their rules treat as a negative undercut.
The selling was led by the electronics group, including contract manufacturers, parts makers, semiconductor equipment, and chip manufacturing, which drove the 1.7% decline in the Nasdaq 100. Higher oil prices took the air out of the transports, with the Dow Jones Transportation Average dropping 1.6%.
Watch the Rotation for Changes
The selling has been broader over the past couple of sessions, but the semiconductors are still driving the rotation in and out of the Mag 7. Money moves into the chip stocks and comes out of the hyperscalers, then reverses, and the indexes absorb it.
What I am watching for is a change in that pattern. There is rotation developing into more defensive groups, pharmaceuticals and oil among them, and that is a different kind of movement than what we have had. Rotation between growth groups is a market deciding what it wants to own. Rotation into defensives is a market deciding it wants less risk.
One item is helping the chips this morning. SK Hynix (SKHY) announced a buyback and cancellation of 40 trillion won worth of its own shares, roughly $29 billion, and committed to returning more than half of cumulative free cash flow generated between 2025 and 2027. The company said the decision reflects its view that its intrinsic value is not fully reflected in the current stock price.
A vote of confidence for valuation in the chip sector will reassure the bulls, but we’ll have to watch the market reaction to this news. The fact that SK Hynix has the pricing power to produce the funds to make this sort of move is good news for SK Hynix, but it is the hyperscalers and other buyers that are paying the price.
My Game Plan
The game plan is patience. My shopping list keeps getting longer while my exposure stays flat, and I am not only comfortable with that but encouraged.
A period of struggle and negative seasonality is a necessary condition for the development of the next crop of opportunities. The setups I want do not appear while everyone is comfortable. They appear after a stretch where stocks get pushed down for reasons that have nothing to do with their businesses, and that stretch has only just started.
My best advice is to embrace the cycles of this market rather than trying to fight them. The traders who struggle most in August are the ones who insist on generating activity when there is nothing to do. September is historically the weakest month of the year and October is when turns tend to occur. There is plenty of time to deploy precious capital as conditions evolve.
At the time of publication, Rev Shark had no positions in any securities mentioned.
