AI Rotation Props Up Indices But the Underlying Action Is Concerning
I’m upping the defense as I don’t like what I see.
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The indices are around flat on Tuesday but I do not like what I see. Breadth is running about 44% positive, and the primary thing holding up the market is the internal rotation in the AI sector, which I discussed in my opening post. We still have some pockets of speculative momentum, but they are a little thinner and entry points are extremely difficult.
An example of a name I added to in the momentum group is Ascent Solar Technologies (ASTI) for a quick trade. Amprius Technologies (AMPX), the recent drone battery play I mentioned, is also looking very good as it breaks out.
Alphabet’s Big Secondary Hits Mag 7
The Magnificent Seven looks particularly poor, but has recovered slightly from a 1% gap-down open. The biggest problem is a 3.7% drop in Alphabet (GOOGL) which is down due to a secondary offering. It would likely be down much more if one of the buyers hadn’t been Berkshire Hathaway (BRK.B). The Berkshire connection under new CEO Greg Abel offers the specter of “value” but this is far from a traditional Berkshire pick.
The AI Rotation Keeps Morphing
A few months ago the AI sector was down on concerns that the hyperscalers were likely to have margin problems. That debate morphed into a rotation with software/AI suffering the brunt of the damage and now it is morphing again into a PC-related play.
That sort of evolution of a major theme is healthy but the problem is that it is narrow in this case and it is the only thing that is holding the indices near highs. The internal action has quite a few issues and there is also the problems of Iran, and these giant IPOs on the horizon.
Patience in Small Biotech
I don’t like this action and I’m suffering a few hits, so I’m going to up my defense a bit more. I see some stocks that I think are going to do well in the next few months but they have no immediate catalysts so they are languishing. Two examples are small biotechnology names Xeris (XERS) and Precigen (PGEN) which have strong fundamentals and upcoming catalysts but they are low priced and illiquid so there aren’t any buyers rushing in to snap them up. These stocks take a lot of patience and I trade them incrementally to avoid tying up too much capital at the wrong time.
Strategy
The indices are looking a lot better than the action I’m seeing in individual stocks and I’m not feeling much love right now. My focus is firmly on avoiding further drawdowns.
At the time of publication, DePorre was long ASTI, XERS, PGEN and AMPX.
