Chips and Inflation Set Up a Difficult Week
This underreported story is likely the most consequential issue right now.
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With the major indexes at important technical junctions, investors are preparing for the next set of news catalysts. Later this week, the major banks kick off second-quarter earnings reports. Earnings estimates expect excellent growth, but the big question is whether expectations, especially in the AI group, are too high.
We are already seeing pressure on Monday on the massive SK Hynix (SKHYV) offering, which is down about 10% and weighing heavily on the Korean exchange. Talk about significant chip shortages does not seem to be moving investors, who are showing skepticism about semiconductor valuations.
The chip sector is trading down around 2% overnight but is off its recent lows and holding the 50-day simple moving average support. While valuations in the group look attractive, investors are nervous and some are moving to the sidelines.
Interest Rates Are the Other Big Issue
Along with earnings, interest rates are the other major issue this week. Fed Chair Kevin Warsh testifies before Congress and will provide the first real details about his thinking.
The Wall Street Journal is also reporting that the massive capex spending in the AI sector is sucking up bond demand and pushing rates higher. The tech giants are borrowing more than expected to fund the buildout, and that flood of new bond supply is weighing on prices.
The impact of AI spending on inflation has been an underreported story, but it is probably the most consequential issue in the near term, especially if AI profit margins come into question. When the market sees more selling pressure, inflation is likely to be the reason given.
Strategy
The rotational theme remains my primary focus but we saw a sharp reversal on Friday. Some of the leading groups have become extended and saw sharp profit taking. The biotechnology sector (IBB) suffered its worst selling in months as it reached an extended condition, but I expect it to consolidate the recent gains and find nearby support.
I am focused on positioning for the upcoming earnings reports and will be adjusting position sizes both up and down depending on my perception of risk. My concern is that the technology sector has to clear a high bar of expectations. There are still many quality names in groups like biotechnology that should deliver solid news. My cash levels are high so I have plenty of flexibility and I will be quick to reduce anything that falters.
I am expecting a difficult week of trading as investors struggle with the chips, AI, and the inflation issue.
Position: None
