Market Takes 1-2 Punch From Oil and Capex Fears
Rising rates and capex fears hit at the same time, but the rotation is limiting the damage.
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The market was hit with a one-two punch on Thursday. The first punch was higher oil and interest rates due mainly to escalating hostilities in Iran. The odds of a Federal Reserve interest rate hike are moving higher as a result.
The second punch was a “sell the news” reaction to a good Alphabet (GOOGL) report and a disappointment from Tesla (TSLA). The main issue there was ballooning capital spending.
There were some analysts proclaiming that the selling in Alphabet was overdone and it is a great buy, but investors had little interest in catching the falling safe. It closed under its 200-day simple moving average for the first time since June 25 and is technically now in a bear market since it is now down around 22% from its highs.
The Magnificent Seven (MAGS) was down close to 4.8% on the day and the tech heavy Nasdaq 100 (QQQ) was hit for a more than 1.5% loss. The Russell 2000 (IWM) held up fairly well in comparison with a loss of 0.5%.
Breadth was 33% positive which is respectable in view of the technology carnage. That is the power of rotational action. New lows expanded to around 220 names which is a jump but still relatively low given the aggressive selling in various areas.
Now What?
The indices have some technical damage to deal with and the AI sector is a mess. The market is confused about what good news for AI looks like. Increased capital spending isn’t necessarily a negative if it is invested effectively and produces a good return, but that doesn’t seem to be an option right now. What is interesting about the AI group is that many of these stocks have great numbers. This is not like the internet bubble, where valuations were based on crazy metrics that had nothing to do with actual earnings.
The good news is that this price action is impacting many innocent victims. Some stocks get sold because the market stinks, not because fundamental conditions have shifted. Smaller stocks go bidless on days like this and fall into the abyss. That can be a great opportunity but it requires both selectivity and patience.
I did almost nothing on Thursday. I had some pullbacks in client accounts but we are not holding much technology exposure and the valuations of what I hold still appear intact. My plan now is to continue monitoring things closely and watch for opportunities to make small buys of some of the stocks I like. With earnings reports approaching quickly it will require some aggressive tactics. There are many good opportunities out there and more developing. Further market deterioration may not be a bad thing.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
