Chips Under Pressure as Rotation Remains the Key Market Theme
This is not unhealthy action. Here’s how I’m playing it.
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Despite positive inflation news and a rotation out of semiconductors and into the Mag 7 names, the market is struggling to build positive momentum. There has been an unusual amount of news flow recently, which has cut both ways, but the good has outweighed the bad.
The chip stocks are under heavy pressure again on Thursday morning. The Korean market was wildly volatile overnight, with SK Hynix (SKHY) down over 11% and Samsung off more than 7%. The selling has spread across the whole semiconductor group. Part of the problem is that Korea’s financial regulator expressed regret over approving high-leverage single-stock ETFs tied to the memory names, and those leveraged products have been amplifying the wild swings in both directions.
Chips Down, Hyperscalers Up
Even with the broad chip selling, the split between the suppliers and the buyers continues to work in favor of the hyperscalers. The pressure on chip stocks is helping big buyers like Alphabet (GOOGL) and Meta (META), which have been pressured by margin concerns for months.
With earnings reports hitting soon there is now hope that the margin pressure will lift even if capital investment continues to soar. The demand picture is still strong, so that margin relief is a hoped-for development rather than something already showing up in the numbers.
The chip and hyperscaler dynamic is another illustration of the key market theme that has been in play for months. That theme is rotation. The S&P 500 topped on June 2 and has been bouncing around in a trading range since then as investors rotate in and out of various sectors and themes like chips, biotech, hyperscalers, and oil.
Rotation Is a Check on Excess
That is not unhealthy action. It works as a check on valuation and extended technical conditions, but it makes life difficult for investors that have counted on riding the AI theme for the long term.
Semiconductors now make up roughly 20% of the S&P 500. During the dot-com peak in 2000 they were just over 8%, and historically they have averaged between 2% and 5%. A group that grew to a fifth of the entire index was always going to face high levels of volatility just due to pure size.
We no longer hear much talk about an AI bubble because of this rotational action. AI is no longer a single monolithic investment theme. It is comprised of a variety of different subsectors such as chips, data centers, software, infrastructure supply, and energy, and each is being questioned in various ways.
The euphoria for AI names that existed in the early days is gone, and that is a healthy thing as the focus is now on margins, growth, and valuation. That is why the upcoming earnings reports are going to be the test of where the market is heading next.
My Strategy
Due to the lack of strong trending action in individual stocks my game plan recently has been to maintain high levels of cash and to focus on trading the rotational action, especially in strong groups like biotechnology. I’ve exited almost all my technology exposure and am waiting patiently for earnings reports to create some new opportunities.
I’m optimistic about the number of good opportunities that will exist but it will require vigilance and patience.
At the time of publication, Rev Shark had no positions in any securities mentioned.
