Mag 7 Action Improves, But Biotech Keeps Delivering the Real Wins
While reverse rotation drives Nasdaq bounce, poor breadth suggests it can’t be trusted.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
A 2.1% bounce in the Nasdaq Composite on Monday was driven by the hardest hit technology and Magnificent Seven names, which offset growing worries about a deeper correction in the AI group. Alphabet (GOOGL) led the move with a 5% gain on its first day as a Dow component, replacing Verizon (VZ). Tesla (TSLA) added 8.5%. Amazon (AMZN) was up 3.2%. Meta Platforms (META) gained 2.2%. The Dow closed at a fresh record high above 52,000 for the first time.
The move was likely driven in part by the end of the second quarter and a positive mood heading into the Fourth of July holiday. Breadth was mediocre at just 50.4% positive, which indicates that this was reverse rotation rather than a broadening of market strength.
The question now is whether investors can build on the move or whether some repositioning hits as the quarter closes and we prepare for second-quarter earnings.
Reverse Rotation Rather Than Broadening
The names that drove the rebound are the same ones that got punished hardest last week. Palantir Technologies (PLTR), the storage group, and the broader Mag 7 names led the move higher off the morning lows. The new money chased the broken names rather than building positions in the rotation themes that have been working.
Investors are inclined to embrace the story that nothing has changed and that dip buyers are smart to take advantage of the pullbacks but the chip issue is a significant factor that is impacting the trajectory of the AI trade.
A sustained market move higher needs broadening participation. A bounce driven by short-covering and quarter-end positioning in the most beaten-down names is not an indication of fundamental health. The follow-through in the next few sessions will show the level of buyer confidence.
Biotech Continues to Lead
Biotechnology has been the rotation winner through the chaos of the past two weeks and the group got more help this morning from Abivax SA (ABVX). The French clinical-stage biotech reported positive ABTECT Maintenance Part 2 data for obefazimod, its experimental drug for ulcerative colitis, which eased the safety concerns that crushed the stock 44% on June 2. The new data showed cancer rates within expected background ranges, which strengthens the case for the FDA filing planned for Q4 2026.
The stock jumped 28% in after-hours Monday and is up significantly again Tuesday morning. The company is also testing the drug in Crohn’s disease, which opens up the multi-billion-dollar inflammatory bowel disease market. There has been ongoing speculation that Abivax is an acquisition target, with Eli Lilly (LLY) frequently mentioned as a potential buyer. Whether or not a deal materializes, the news today is the kind of stock-specific catalyst that has been driving the biotech rotation while the broader market chops.
I’ve been holding and trading ABVX for a while and will be looking for opportunities to take advantage of the enhanced volatility.
Strategy
My game plan remains the same with high cash levels, tight trade management and selective stock picking. I am focused on the rotation winners and names with their own catalysts. I am not optimistic about a sustained surge in overall market momentum from here and have little interest in chasing a resumption of the AI trade.
The main issue this week is positioning around the end of the quarter and the unwind of the Russell rebalance from Friday. Quarter-end flows may produce movement unrelated to fundamentals. The Russell unwind is less visible but it will play out over the next several sessions as the speculative positioning that built up around the rebalance resets.
The next major catalyst for the broader market is second-quarter earnings season, which starts in roughly two weeks. The primary issue will be margins and capex in the AI-related names. The chip suppliers have shown they can deliver. The question is whether the chip buyers can defend their margins while spending what they need to spend to maintain competitive position.
The other variable to watch is interest rates. The market is now pricing a 70.4% probability of a Fed rate hike before the election, up from around 40% three weeks ago. That is significant pressure in a short time and reflects the cumulative effect of the hawkish Warsh meeting, the hot PCE data last Thursday, and the inflation worries from the AI buildout.
If the broader market action softens from here, interest rates and inflation will be cited as the reason for the selling. The convenient excuses are usually the ones the market has been ignoring for weeks, and this one has been building since mid-June.
The overall market mood remains positive as investors look forward to the July 4 celebration but volume will slow and that will enhance volatility.
At the time of publication, Rev Shark was long ABVX.
