Inflation Cools, but the Market Still Lacks Leadership
The focus turns to earnings as AI and chip leaders struggle.
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The market is set for a mild positive open on Wednesday with technology stocks leading. This follows a noisy session marked by several significant news events. The most notable was a surprisingly soft CPI report that cooled some worries about inflation.
The better-than-expected CPI report was driven primarily by lower energy prices, though favorable declines also occurred in other areas. The bond market didn’t have much of a reaction, which is the most important test, and the odds of a September rate hike remain around 50%.
Inflation is the biggest obstacle the market faces as the indexes bounce around in a trading range and struggle to resume the powerful momentum that existed at the beginning of June. The big question now is whether earnings will be the catalyst that drives the market.
Earnings Are the Next Test
Earnings season started fairly well with strong positive reactions to reports from JPMorgan Chase (JPM), Goldman Sachs (GS) and Bank of America (BAC), but the real test of this market will be the technology names and the Magnificent Seven. The issue of capital spending and profit margins will be front and center. Many names in these groups have struggled in the second quarter so expectations are lower, but proving long-term profitability will be a difficult task.
The chip sector rebounded on Tuesday as concerns about the sustainability of high demand were set aside. The VanEck Semiconductor ETF (SMH) has been volatile recently but is riding support at its 50-day simple moving average. SK Hynix (SKHY) rebounded sharply on Tuesday but is back down about 6% early on Wednesday.
A Market Without Leadership
This is a tough market to trade right now unless you are a day trader with short time frames. The biggest issue is that there isn’t any strong leadership.
The Mag 7 have lost their crown and semiconductors and other technology names are volatile rather than trending. There was strong rotational action into biotechnology and some other groups, which have cooled, but no other rotational winner has emerged yet.
What the New Highs and New Lows Show
As I’ve noted, there have been more stocks making new 12-month lows versus new 12-month highs. This is an interesting statistic to study because it provides insight into whether there is any strong leadership.
Typically a market where the indexes are sitting as close to all-time highs as this one should have far more new highs than lows. The leading sectors that are driving the indexes should continue to produce a steady supply of stocks at new highs. That is not happening, and that is because of the strong rotational action and recent underperformance by many of the key AI plays.
Investors are still gravitating to the AI and semiconductor stories because they are the best stories in the market, but the price action isn’t there, and that is trapping many traders trying to catch a resumption in past winners.
Strategy
This all makes for tricky trading and it is driving me to maintain high levels of cash and to stay selective with new buys. My primary focus right now is to prepare for trade opportunities as earnings reports hit. There are some names currently selling off that will have good reports, but there will be many good names that will offer entries due to volatility when the numbers hit.
My best advice is to stay patient, focus on the rotational action rather than the indexes, and make sure you have some cash in reserve so you can be flexible and reactive.
At the time of publication, Rev Shark had no positions in any securities mentioned.
