As Semis Sink on ASML Slip, Small Caps Show Strength
The question now is whether we're seeing a major shift or if tech's move down was just a blip.
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Investors were surprised on Tuesday when the largest semiconductor produced in Europe, ASML Holdings NV ASML, accidentally announced much lower orders than anticipated. The stock fell 16% and is trading down even more early on Wednesday. The semiconductor exchange-traded fund SMH lost 5.4% and is indicated flat so far on Wednesday.
The immediate question that the market is pondering is whether this surprise news indicates that a major shift in the economy is occurring or is it just a blip in one area that will be offset by continued strength in artificial intelligence and dovish central banks.
The market has been cruising along very nicely recently on the belief that economic conditions are ideal. Inflation has fallen sharply, and economic growth has remained strong. There have been a few signs of a blip higher in inflationary pressures, and there is a slowing in the jobs market, but the narrative is that the Fed is very well-positioned and will deliver quarter-point rate cuts at the next two meetings to help battle any economic slowing.
Technology stocks were hit hard on the semiconductor news, with the Nasdaq 100 QQQ losing 1.3% and the Magnificent Seven MAGS down 0.8%, but small caps broke out the Sept. 18 high before closing around flat. Breadth was not bad.
There are a number of news events that will influence where the market is heading next. Israel has announced that it has plans in place for a response to Iran, and that could occur at any time. Chinese stocks are stumbling as skepticism grows about the huge stimulus plan that was announced in September. Many stocks are back to the point where David Tepper of Appaloosa Management said on CNBC to buy everything.
There is no major economic news, but earnings season will continue to pick up steam when Netflix NFLX reports on Thursday night.
The good news is that there is rotational action that is benefiting financials, small caps, and other areas of the market. That is a very healthy development and reduces the risk of a broad market selloff. Big-cap technology has lost its relative strength in recent months, but other areas of the market have picked up the slack and kept the S&P 500 at highs. If the action continues to broaden into other areas, this bull market can continue for a while.
We have a mixed start on Wednesday morning.
At the time of publication, DePorre had no position in any security mentioned.
