Palantir Breaks Support as Market Action Deteriorates Into the Close
Here’s why the setup is difficult as well as one area where the action is working.
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The market started off well Monday with chip stocks leading, but the action deteriorated through the day. By the close, the Magnificent Seven (MAGS) was lagging badly with a loss of about 2%, and Palantir (PLTR), which was one of the early AI leaders, breached key support and was hit with a loss of 7%.
Chip stocks held up with a gain of 1.3%, but overall market breadth slipped to 42% positive. There were 259 new 12-month highs against 245 new 12-month lows, suggesting a mixed market beneath the headline numbers.
The Action Deteriorated Into the Close
There is still some good speculative action in smaller stocks, which supports stock picking, but I do not like the feel of the broader market action. I have some nice movers in the biotechnology sector, including Definium Therapeutics (DFTX), Nektar Therapeutics (NKTR), Neurocrine Biosciences (NBIX), Revolution Medicines (RVMD), and Cullinan (CGEM). The strength in specific biotech names is the kind of relative strength that works when the indexes are struggling and the conditions in the broader market are not great.
The contrast between the headline action and the action under the surface is the story of the day. The indexes closed weekly after a strong open, which is an indication of market distribution rather than accumulation.
Palantir breaking key support is significant because it was one of the leaders that drove the rally into June, and losing the leadership names puts more pressure on the remaining narrow group that is still working. Palantir is a good illustration of how the AI sector has been undergoing a shift in leadership as it grows and evolves.
Why the Setup Is Difficult
The indexes have the same problem they had Monday morning. Major catalysts are behind us. Q2 earnings do not start for another three weeks. The Micron Technology (MU) earnings report Wednesday and the May Personal Consumption Expenditures data Thursday are the only near-term events that can move the indexes, and both have the potential to disappoint rather than support more upside.
Valuation concerns are building, breadth is narrowing, and the Fed is preparing the ground for hikes rather than cuts. That combination creates conditions for consolidation or rotation rather than sustained index gains.
Strategy
I cut some laggards Monday, and my cash levels are now around 45%. I continue to be skeptical about the ability of the indexes to rally much from here, although the rotational action is still offering opportunities. The biotech names are an example of where the action is working. The path forward is selective stock picking rather than index exposure.
I am proceeding with caution and using shorter time frames. The defensive posture has been working through the past three months and market conditions support staying with it.
Have a good evening. I’ll see you Tuesday.
At the time of publication, Rev Shark was long DFTX, NKTR, NBIX, RVMD and CGEM.
