It’s Time to Make Some Moves as a Shift in Market Character Develops

There have been warning signs of a shift in market character for a week or so, and it is picking up momentum on Thursday morning. Broadcom (AVGO) reported earnings after the close on Wednesday and is down about 12% in premarket trading, dragging the entire chip sector lower. Marvell Technology (MRVL), Super Micro Computer (SMCI) and Intel (INTC) are all sliding ahead of the bell.

The internal AI rotation I have been discussing is now reversing and many traders are trapped due to chasing some of the froth in chips and AI infrastructure. The Magnificent Seven (MAGS) is breaking down from a double-top pattern and lacks any strong immediate support.

Broadcom Disappoints and Triggers a Chip Cascade

Broadcom’s report was solid versus the stated estimates but did not deliver what the market was priced for. Revenue of $22.19 billion was a slight miss against the $22.27 billion estimate. EPS of $2.44 beat the $2.40 estimate. AI revenue more than doubled, year over year, to $10.8 billion.

The disappointment was that CEO Hock Tan did not raise the company’s full-year AI chip sales target of $100 billion for 2027, which is what an extended group leveraged to AI needed to do to excite investors. The VMware-driven software unit also missed, which added to the pressure.

I mentioned the other day a report from Goldman Sachs (GS) that highlighted the internal rotation in the AI sector over the past few sessions. Big funds have been “degrossing,” which is a fancy Wall Street term for reducing risk. They have been doing this by reducing some of the extended longs and covering shorts in the laggards. The action got frothy in a few names due to short-covering and chips went parabolic.

Broadcom’s report is the first earnings event with enough size to break the momentum, and it is taking down the entire chip group on the same dynamic in reverse. The buyers who chased into the parabolic move are the ones now facing the unwind.

IBIT Adds to the Speculative Stress

Another piece of the picture is the iShares Bitcoin Trust ETF (IBIT), which is close to testing the February lows around $35.30. That kind of weakness in the most speculative asset in the market indicates risk appetite is under pressure.

Bitcoin tends to lead equity speculative behavior by a few sessions, and when it cracks support, the equity speculation that has been working in pockets often follows. If IBIT loses the $35.30 level and equities start to struggle, the spillover from a weak bitcoin chart becomes a real problem rather than a separate story.

The combination of chips rolling over on Broadcom and IBIT testing structural support is the kind of confluence that does not usually resolve quickly. Both are speculative indicators that have been running on momentum, FOMO, and positioning rather than on valuation and fundamental change. When the positioning unwinds, it doesn’t happen in just one or two sessions.

Strategy

I have been stressing defense and tight trading for a few weeks. I was stopped out of a few positions on Wednesday and will likely make further reductions Thursday.

The one area that was interesting on Wednesday was a rebound in the biotechnology names that were hit hard on Tuesday, which is the kind of rotation worth watching in this environment. We need to see if money coming out of chips and AI flows into something new right away or sits on the sidelines.

I continue to monitor the low-priced names that are drifting at support levels and will look for opportunities to build positions as second-quarter earnings approach or other catalysts develop. In a corrective phase, I like to watch for innocent victims that are suffering due to a lack of liquidity rather than anything fundamental.

The chip cascade and the IBIT weakness are signaling that the character shift I have been tracking is becoming more decisive, and the right response is patience and discipline rather than rushing to buy pullbacks.

At the time of publication, Rev Shark had no positions in any securities mentioned.