Counter-Rotation Ends Messy Week, and a Big Test Looms
The action on Friday made it difficult to put much money to work.
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Thursday’s rush out of AI reversed on Friday. Next week’s mega-cap reports will show whether expectations came down far enough.
After the vicious rotation out of chips, data centers, the Magnificent Seven and other AI-related names on Thursday, we had a counter-rotation on Friday. Breadth fell to about 38% positive, and new 12-month lows were back above 420. The SPDR Dow Jones Industrial Average ETF (DIA) lagged with a loss of 1.2%, while the Invesco QQQ Trust (QQQ) finished flat.
As I’ve been writing, unwinding this two-tiered market is going to be a bumpy ride. Something this extreme doesn’t correct in a straight line. We get a day of heavy rotation, then the money flows back the other way while investors try to figure out where they want to be.
Oil and Bonds
An additional issue is the continued strength in oil. The United States Oil Fund (USO) and the United States Brent Oil Fund (BNO) both pushed to new recent highs and saw steady buying all day. Bonds, which were a safe haven on Thursday, reversed lower today. Part of that was the counter-rotation, but the climb in oil is likely creating some inflation fears as well. When bonds and stocks fall together, there aren’t many places to hide.
Next Week’s Test
It is messy out there, and it sets up an interesting dynamic for next week, when Microsoft (MSFT), Alphabet (GOOGL) and other major Magnificent Seven names report, along with a slew of other technology companies.
The question is whether the poor action this week did enough to lower expectations. Meta Platforms (META) and Tesla (TSLA) had solid numbers and were sold anyway because investors are worried about capital spending and profitability. Those worries aren’t going away. The mega caps reporting next week are likely to raise their spending plans again, and that is what investors are nervous about.
The difference is positioning. Hedge funds have been unwinding AI positions for weeks, and Thursday’s selling flushed out a lot of the holders looking for an exit. If enough of that selling is done, decent reports could finally get a decent reaction. If it isn’t, we will see more of the same sell-the-news action. I don’t think anyone knows which it will be, so I’ll let the price action tell me.
Game Plan
The counter-rotation on Friday made it difficult to put much money to work, but charts are developing, and there are some signs of new leadership. Computer security was the leading group on Friday and attracted some momentum money, which is the kind of action I want to see as the market looks for new places to go.
I’m optimistic about the opportunities that are developing, but patience and vigilance are necessary.
Have a great weekend. I’ll see you on Monday.
At the time of publication, DePorre had no positions in any securities mentioned.
