AI Names Crater, Average Stocks Rise in Dramatic Rotation
The gap is closing, but the opportunity is in new leaders, not broken AI names.
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I’ve been discussing the two-tiered nature of this market and the gap in performance between AI-related names and the rest of the market for months now. My thesis was that this gap would eventually start to close, but we couldn’t be sure how that would occur. Today we had a significant advance in the narrowing of this gap.
The easiest way to see it is in the indices. The Nasdaq 100 dropped about 2.9%, the Roundhill Magnificent Seven ETF (MAGS) fell 3.5% and the VanEck Semiconductor ETF (SMH) fell 5.8%. At the same time, the Dow Jones Industrial Average was flat, and the iShares Russell 2000 ETF (IWM) had a small gain. Most notably, the Invesco S&P 500 Equal Weight ETF (RSP) was up 0.7%. Despite the carnage in the AI group, breadth was 47% positive.
That is the most dramatic reversal we have seen between the two tiers of the market since this split began. The question now is whether it continues, and if it does, whether we will see continued severe pressure on the AI sector or whether it will chop around while the rest of the market gains momentum.
New Leaders, Not Old Bottoms
No one knows the answer to that. We need to stay focused on the charts and look for those that are building support and showing signs of relative strength. Lots of folks are going to try to bottom fish the broken AI names, but I believe you would be better off looking for new leaders rather than trying to catch a bottom in the old ones.
Bonds Are the Safe Haven Again
We had another rotation on Thursday as well, between equities and bonds. Bonds were a major problem for the market for a while as rates moved higher, but as the leading AI names struggled, bonds regained their status as a safe haven. Bonds were strong on Thursday as money that left the AI sector looked for a nice, safe yield.
Good Reports, Bad Reaction
Ironically, the trigger for this severe rotational action was seemingly good earnings reports from Meta Platforms (META) and Tesla (TSLA). Investors are fearful that the massive investment needed in computing power may not deliver the payoff that is being priced into these stocks. On Thursday, the whole sector was sold, but there will be opportunity as the market sorts out which companies can navigate the capital markets and protect profit margins most effectively.
Game Plan
My game plan has been to watch for this rotational action to gain traction and to focus on the best charts as it evolves. That isn’t as simple or as easy as it sounds, since there is elevated volatility and a lot of trading action that has no relationship to fundamentals. I do feel optimistic about the many opportunities that are developing, but it is going to take some hard work and patience to generate profits.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
