Memory Stocks Lead Rally While Bears Stay on the Sidelines
Breadth was strong, oil cooperated and the chip sector went into overdrive on Tuesday.
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The Nasdaq 100 and Russell 2000 extended further into new high territory on Tuesday. Breadth was robust, with 62% of stocks in positive territory and around 330 new 12-month highs. The Russell 2000 small caps were up about 1.7%, continuing the leadership shift that we have been watching for since last week.
The Memory Rampage
What was most notable about the action was the rampage in memory stocks. Intel Corporation INTC, Micron Technology Inc. MU and Qualcomm Inc. QCOM all advanced more than 10%. The VanEck Semiconductor ETF SMH was up over 3%. Server DRAM contract prices have reportedly more than doubled quarter over quarter, and HBM capacity is sold out through 2026. Those are not subtle numbers.
The action in this group is alarming to contrarians who view strong momentum as irrational. I do not know how irrational it is, but valuation in the group is not crazy.
What has shifted is that the argument that the group is cyclical is being challenged. Stocks like Micron have historically been closely tied to the economic cycle, and anytime the P/E got too high, they were good sales. The thesis right now is that AI memory demand has changed the shape of the cycle. The pricing data so far supports it.
The famous last words of many investors are "it's different this time." It may not be different this time. but the trend can persist longer than seems reasonable, and the contrarians have been wrong all year on this group.
A Calm Tape Underneath
The rest of the market had plenty of positive action, but it was much more sanguine. The Magnificent Seven gained 0.2%, biotechnology IBB was weak, and the Dow Jones Industrial Average is still below its all-time highs. The setup is one in which leadership is concentrated in a few hot pockets, while everything else churns at higher levels. That is not a bad thing. It just means the work is in stock picking, not index chasing.
The Iran issue was mostly ignored as oil softened and there were not any new significant developments. Interest rates also softened after hitting recent highs on Monday. Market participants are focused on economic growth and the strength of the AI sector. Oil, inflation and the macro overhang just are not having an impact right now. That can change in a hurry, but for Tuesday, the dip buyers had clean conditions to work in.
My Game Plan
There are pockets of overbought action, with the chip sector being the primary example, but there are still plenty of good charts, and traders are doing well with momentum in many areas.
I am watching many smaller stocks that are reporting earnings this week. Big caps reporting on Wednesday include The Walt Disney Company DIS, Uber Technologies Inc. UBER and DoorDash Inc. DASH. However, the small-cap reports underneath are where the real opportunity and volatility lives. Just take a look at Ballard Power BLDP, which I mentioned on Tuesday morning.
My best advice is to stay focused on the charts and not let contrarians or bears tell you that they are smarter than the price action.
Have a good evening. I'll see you tomorrow.
Related: Should You Set Money Aside for SoftBank’s New AI Play?
At the time of publication, DePorre was long BLDP.
