Macro Headwinds Build, But They Can’t Stop the Chip Rampage
This is the part of the recent action that has bears scratching their heads.
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Two-tiered market action continued on Monday, but an intraday reversal slowed the positive momentum, and breadth slipped to just 38% positive. The Russell 2000 small-cap index (IWM) exhibited relative strength with a gain of 0.3%, while the Mag 7 names lagged with a loss of 0.3%. Semiconductors continued their rampage with a gain of 1.8%, but new 12-month highs contracted a bit to around 275.
There were plenty of 10% upside movers, but 240 stocks also hit new 12-month lows. It is a tale of two markets, with some aggressive chasing in a few technology names and plenty of poor action under the surface. Talk about bubbles is distracting some folks from poor action in the broader market.
No Progress on the Iran Problem
News flow on Iran turned worse over the weekend, with the U.S. rejecting Iran’s latest proposal on Sunday and the Persian Gulf impasse showing no signs of an off-ramp. Crude oil pushed about 3% higher and traded back near $100 a barrel, gas now averages $4.50 a gallon nationally, and bonds weakened with yields ticking up across the curve. None of it affected the momentum in semiconductors or the favored AI infrastructure names, which kept their run going as if the geopolitical problems didn’t exist.
This is the part of the action that has bears scratching their heads. Higher oil, an ongoing Middle East conflict, and rising yields would normally cut risk appetite and pressure multiples. That is happening across most of the market, as the 240 new lows tell us. The AI infrastructure group is operating in its own world, though, and as long as that momentum holds, the bears will remain frustrated.
Monday’s action is the live demonstration of what I wrote about this morning. The bubble debate is heating up while semiconductors go parabolic, and the gap between most of the market and the leadership groups is increasing.
The 240 new lows alongside the chip rampage is exactly the narrow breadth pattern that the bears say is a problem. I contend it is not a problem for stock pickers who go where the money is flowing. It is a problem for index buyers and for traders who try to fight the trend.
This action is also driving underperformance for most investors. There is no way to outperform with a balanced portfolio since all the gains are coming in just a small group of technology stocks. Even the most bullish players are having a hard time keeping up with this action and that is keeping sentiment from looking anything like it did back on 1999-2000.
The AI Sector Is Splitting into Pieces
AI continues to behave as multiple sectors rather than just one, with the Roundhill Magnificent Seven ETF (MAGS) closing down 0.3% while the VanEck Semiconductor ETF (SMH) gained 1.8%. The same group that the bubble pundits treat as a single bet is splitting right in front of us. Infrastructure and chips are leading, and the Mag 7 names are lagging on the same session. That rotation inside the group is where the focus has to be, and it is the reason monolithic bubble arguments miss the point.
A Pile of Catalysts Awaits
CPI is out Tuesday morning and PPI on Wednesday. President Trump arrives in Beijing Wednesday for two days with Xi, and Iran will be on the agenda.
The TACO trade has been the dominant pattern all year, but Trump’s “TOTALLY UNACCEPTABLE” response to Iran on Sunday is the first time in months that his rhetoric has not softened within 48 hours. The next 72 hours will tell us whether the walk-back is coming or whether the market needs to start worrying about something more serious.
My Strategy
My approach has not changed. I am keeping cash high, holding stops tight on the names that are working, and looking for the next setups to emerge as the rotation continues. Monday did not trigger the sell-the-news reaction I’m expecting, but the conditions for it are still in place. Stay engaged with the flow, ride the rotation as it shifts, and keep your cushion of profits intact.
Have a good evening. I’ll see you Tuesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
