Gap Between Market’s 2 Tiers Starts to Close
SpaceX saw beats on both the top and bottom line but is trading flat in front of the conference call.
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The market action on Tuesday was exactly what I have been anticipating. Breadth was strong, with about 67% of stocks advancing. But the biggest positive was that the gap between the two tiers of the market started to close.
Big-cap technology and AI lagged while small caps and secondary stocks outperformed. The Roundhill Magnificent Seven ETF (MAGS) finished with a loss of 0.4%, while the Russell 2000 jumped 1.6% and the SPDR S&P Biotech ETF (XBI) gained 4%. The Invesco QQQ Trust (QQQ) lost 0.2%, and the VanEck Semiconductor ETF (SMH) was down 0.4%.
Compare that with Monday: The mega caps did the heavy lifting while most stocks went nowhere, and the gap between the two tiers got wider. On Tuesday, it ran the other way. The AI leaders sat out and the rest of the market moved up. That is the difference between a short-covering bounce in the most beaten-down names and money actively moving to new places.
The biotech move stands out. The group was hit with a wave of mechanical selling earlier this month as funds cut their exposure across the board. A 4% gain in a single day suggests buyers are coming back to stocks that were sold for reasons that had nothing to do with the companies themselves.
Stock Pickers Show Up
The AI names recovered some from their early lows, and there were still more than 300 new 12-month lows, so this isn’t an all clear. However, the stock pickers I discussed on Tuesday morning showed up and put some cash to work. Fund managers who are behind their benchmarks need the laggards to catch up, and on Tuesday they started acting like it. It is just one day, but there are indications that a shift is developing.
A sharp drop in oil helped early in the day. Then Iran denied, once again, that there was any progress toward a deal, and the United States Brent Oil Fund (BNO) went back up and finished with a small loss. Interest rates were a little lower, which helped the smaller, rate-sensitive names.
The big question now is whether the upcoming earnings reports will add to this rotation or stop it. SpaceX (SPCX) is our first clue.
SpaceX
SpaceX beat on both the top and bottom lines. Earnings came in at $0.35 a share against the $0.13 consensus, and revenue of $14.58 billion topped the $12.87 billion estimate by about 13%. Those are big beats, and the stock is around flat in after-hours trading anyway.
That is the issue I raised on Tuesdaymorning. The headline numbers are good, but as we learned from the Magnificent Seven names last quarter, that isn’t always enough to generate a positive response. With SpaceX, the conference call and guidance will be far more important. Investors want to know how much more it will spend on data centers, chip manufacturing and Starship, and where the money will come from. It is likely to take a while for investors to sort out what it all means.
I’m sticking with the plan I laid out at midday. I’m holding my position, and I’ll let the reaction to the call tell me what to do next. A gap down on spending worries would be a chance for a bounce trade. After the last report, the stock hit its low the day after the numbers came out and then ran more than 35% over the next two months. A gap up would give me a chance to take some profits.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long SPCX
