Chips Enter Bear Market Territory Ahead of Big Tech Earnings
Is intense selling in AI-related names getting the market too bearish in front of key reports?
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An ugly session in chips, technology, high-growth, and other sectors was largely hidden by the senior indexes on Thursday, but the selling triggered an intense response overnight across markets worldwide.
The semiconductor sector (SMH) has bounced back from some of the worst overnight selling but is still indicated down 2.3% as I write. The Mag 7 names have been reacting favorably to the recent drop in memory prices, but the group is struggling Friday with all seven names in the red in the early going. The mega-caps, and Apple (AAPL) in particular, have been hiding places recently while the rest of the market corrected. When all seven are red at the same time, the safety trade itself is being sold.
The correction in AI-related names and chips has been ongoing for a while, but the high volatility has prevented breaches of key technical levels. The selling is now so severe that many chip names are down more than 20% from their highs, which is the traditional definition of a bear market. Micron (MU) is down around 30% after a blowout earnings report and spectacular guidance.
Other AI-related sectors, such as data centers and suppliers, are under extreme pressure. Dell Technologies (DELL) is falling into the gap produced by a blowout report and testing its 50-day simple moving average.
Poor earnings reports from IBM (IBM) and Netflix (NFLX) are doing nothing to help the situation. Expectations were already low for Netflix and it still disappointed, pushing the stock down close to 10% on Friday morning. The disappointments are notable because they are broadening beyond the AI trade. Netflix is not a chip story. When the misses start coming from multiple directions, the earnings worry stops being sector-specific.
We have a barrage of major technology companies reporting next week, and this intense selling will lower expectations, making for some interesting trading. The Mag 7 reports start hitting within days. Is the market getting too bearish on chips and AI in front of these reports? Low expectations into big reports is how sharp rallies get started.
A third issue that is not helping is oil moving higher again. Bonds are acting better, however, which may reflect some concerns about economic slowing rather than inflation relief.
Strategy
Some traders are hoping that the selling Friday morning will be a washout that moves us closer to a tradable low in the worst sectors. I am not in any rush to try to call a bottom. I am more concerned with finding stocks that have already found support and are building better setups.
I have plenty of cash and a long shopping list, so my main focus is on timing. I am making a few incremental moves as pressure builds for a rebound.
At the time of publication, Rev Shark had no positions in any securities mentioned.
