Hot CPI Shakes Leaders and That’s What the Market Needed
Stocks were slammed after a hot core CPI report, but bonds rallied and biotech rose.
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Stocks were slammed on Wednesday following a hotter-than-expected core CPI report. Most interesting was that bonds bounced and interest rates fell while the indices posted their worst action in months. The iShares 20+ Year Treasury Bond ETF (TLT) moved higher as a steady stream of selling in equities all day appears to have triggered a move into the safety of bonds, which are offering yields near their highest levels in years.
Safe Haven Cracks
Another notable development was that the Magnificent Seven seem to have lost their safe-haven status. Several of those names were higher at the start of the day after the CPI report, but by the closing bell only Apple (AAPL) stayed positive. The Roundhill Magnificent Seven ETF (MAGS) lost 2%. On Wednesday morning, I wrote that a hot number would probably help the mega caps. It did initially, but they reversed fast and hard, the kind of surprise that signals something has changed.
The hardest-hit areas of the market were semiconductors, data centers and AI infrastructure names. The Innovator IBD 50 ETF (FFTY), which holds many of the leading momentum names, was rocked for a loss of 4.5%.
I have been yammering about the two-tiered nature of this market for months, and the gulf between the mega-cap AI names and everything else has only grown worse. The action today felt like the first step in finally addressing that disparity.
Biotech Holds Up
One group of particular interest to me is biotechnology, which has been hit hard by hedge fund degrossing. The group is deeply oversold, and the iShares Biotechnology ETF (IBB) managed a gain of 1.6% while MAGS lost 2.2%.
The internal market stats have been negative for a while, and that accelerated today. Breadth was down to around 22%, and there were just 75 new 12-month highs against 700 new 12-month lows, which produces the aroma of fear.
Much of the market is already deep into bear territory, so a drop like Wednesday’s feels more like capitulation for many of these names. The indices and the leaders, on the other hand, are still barely off their highs and are vulnerable to more downside if the pressure continues. The big question is whether the stocks that have already been battered can benefit from some rotation out of the recent winners.
Game Plan
It was an ugly day for most existing positions, but the good news is that we needed a hard shake like this to start closing the gulf between the AI leaders and the rest of the market. I don’t know how the gap between the two groups will close, but so many stocks have already corrected so deeply that the odds they are close to a turn are fairly good.
The big danger is in the AI names that many folks think are fundamentally cheap. Forward estimates for these stocks are shifting, and they may not be the bargains that many think they are. If they stay under pressure, it is going to hurt sentiment and may hamper the rotation.
I did a little buying in some beaten-up names, but it is important to keep some dry powder for the opportunities that arise as the market sorts this out. I’m optimistic about the opportunities that await.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
