For the Best Trades, Look Beyond the Magnificent Seven
As some sell-the-news action triggers rotation, I'm seeing opportunities emerge in the small caps and elsewhere. Here's how I'm getting positioned.
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A combination of "sell the news" and rotational action is hitting the market on Thursday morning following four major AI-related earnings reports. The Magnificent Seven is being hit for a loss of around 2.5% even though Alphabet Inc. (GOOG) , (GOOGL) is trading up more than 5%.
Meta Platforms Inc. (META) is taking a 10% hit, Microsoft Corporation (MSFT) is down 5%, and Amazon.com Inc. (AMZN) went green to red after a gap-up open. The biggest problem is Nvidia Corporation (NVDA) , which is down about 4% and won't report earnings for a couple of weeks. Chip competition from Amazon.com Inc. (AMZN) and Alphabet Inc. is weighing on the name and illustrates how competitive forces will trigger volatility within the AI sector.
Underneath, Things Are Better
The good news is that small caps (IWM) are up 0.7% and have recouped Wednesday's losses. This is leading to improved breadth, with about 56% of stocks in the green. This illustrates my point about how this is a market for stock pickers rather than index momentum. There are a fair number of individual stocks up more than 10% an hour into the action, but the number that are at intraday highs is slipping fast.
Oil is lower, which is helping, but the primary issue at work is good old-fashioned sell the news action. Good reports are an invitation for sellers to take some profits in the most extended names. They aren't selling because they are bearish or negative. They are selling because they are prudent investors that are trying to keep accounts close to highs.
Related: Amazon Price Target as In-House Chip Business Hits $20 Billion
My Game Plan
I reduced a few things and haven't made any significant buys so far. It is going to take a little time for the market to digest the earnings news and for new themes and leaders to develop. My primary goal is to catch trends in the best stocks and sectors, but right now those themes and trends are a bit murky.
The indexes may need some time to reset, but I remain highly optimistic about the opportunities ahead. My best advice right now is to look beyond the Magnificent Seven for stocks with solid support and attractive valuations. Watch for some relative strength to develop and trade them aggressively. I'll be posting some new names as I find them.
At the time of publication, DePorre was long Alphabet, Nvidia.
