As Stretched Names Get Hit, Will Downside Momentum Spread?
Sell-the-news pressure emerges as Advanced Micro Devices , Intel trade off in premarket and interest rates spike higher.
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The indexes finished on Thursday at record highs as investors continued to celebrate a flood of positive news.A stack of positive catalysts, however, has already been discounted and there isn’t much other than emotions to keep driving stocks higher.
The bulls have been feasting on a diet of positive developments: The Trump-Xi summit in Beijing, Cisco Systems (CSCO) jumping 13.4%, Nvidia (NVDA) rising 4.4% on potential sales of its H200 in China, and Cerebras Systems’ (CBRS) initial public offering closing up 68% on the first day of trading.
The Dow was back over 50,000 for the first time since February and the S&P 500 closed above 7,500 for the first time ever. When the action is that positive, the bar for more upside is high and the likelihood of a sell-the-news reaction goes up with it.
Futures are pointing to a poor open with the S&P 500 down about 1.0%, the Nasdaq 100 down 1.5%, and chips leading the way lower. A spike in oil and pressure on bonds are adding to the negativity.
The Bond Market Takes the Lead
The number that matters the most this morning is 4.54% on the 10-year Treasury, the highest level in nearly a year, and Brent above $109 is adding pressure. The odds of a rate hike are near 50%, up from roughly 14% a week ago.
The China summit closed with Pres. Donald Trump saying he and Pres. Xi want the war in Iran to end and that they had reached “fantastic trade deals” without offering specifics. China mentioned “a series of new common understandings” with no details attached. The H200 news that boosted Nvidia on Thursday appears to be the only tangible result, and now there is some sell-the-news reaction in the chip sector. The bond market saw this coming and equities are catching up this morning.
Applied Materials Is the Tell
Applied Materials (AMAT) raised its outlook on accelerating demand for AI computing equipment, and the stock is red premarket anyway. When the most bullish operational news in the group cannot lift a stock, the issue is valuation.
Intel (INTC) is among the hardest hit in early action, off more than 4% after a year-to-date gain north of 200% through Thursday. Nvidia and Advanced Micro Devices (AMD) are also retreating. The most stretched names are being hit and the issue now is whether downside momentum will build and whether it will spread to other areas of the market. I’ll be watching closely for signs of rotational action.
Game Plan
The plan here is to have stops in place in case the dip buyers take the day off. It is essential to protect gains. You can always buy back a stock that you sold but you can’t sell them retroactively. Focus on keeping accounts close to highs and don’t let FOMO impact your decision-making.
The action under the surface will be important in determining whether we have broad de-risking or rotational action into the groups that did not participate in the run from April.
Broad selling will manifest itself by the Russell 2000 staying weak with the Nasdaq, equal-weight underperforming cap-weight, advance-decline negative across the board, and the Volatility Index holding its morning gain into the afternoon. That is the warning that multiples are under pressure and a setup that pulls cash into T-bills at 4.5%.
Rotational action will focus on energy, staples, healthcare, utilities, and the unloved cyclicals catching a bid while chips bleed. We need to watch to see if the Russell 2000 firms up after the open and whether equal-weight outperforms cap-weight. That is an indication that cash is staying in the market and moving to different addresses. Energy is the obvious candidate for flows given Brent above $109 and the inflation story it is feeding.
The question is not how much red we see today. The question is whether cash is moving within the market or leaving it.
Nvidia reports on Wednesday, the last big catalyst before the Memorial Day holiday. The recent runup has set a high bar, and it’s not surprising that there is some anticipatory profit-taking at this point. Expectations have gotten too high, and Nvidia is not immune to competition.
I have been writing about stagflation as a problem that will be quickly embraced once there is some market weakness. With oil above $109 and the 10-year at 4.54%, the inflation issue can’t be ignored, and the market is taking it seriously this morning. Whether that is now a major theme, we will have to wait and see.
At the time of publication, DePorre was long NVDA.
