Positive Seasonality Fails as AI Trade Sees a Shift
The action looked good ahead of the July 4 holiday but then a major shift took semiconductors to the downside.
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Positive pre-July 4 seasonality failed for the second day in a row on Thursday.
The action looked good at the open as stocks spiked on a weaker-than-anticipated employment report. Investors were hopeful that the slowing in the jobs market would make for a less hawkish Fed, but bonds didn’t move much, and the word “stagflation” was heard in some economic discussions.
However, the main problem is a major shift in the AI trade. Semiconductors (SMH) led to the downside with a loss of about 4.5% and the Nasdaq 100 (QQQ) was hit for a loss of 1.75% and a retest of the 50-day moving average support.
The AI Trade Shifts
The good news is that this is not broad corrective action so far. There is significant rotation taking place. The DJIA gained 1% and there was strength in retail and the Magnificent Seven (MAGS). There was some significant pain in AI-adjacent sectors like data centers and optical but biotechnology (IBB) continued its trek higher with another gain of over 2%. The Michael Burry shorts I discussed on Thursday morning look prescient one day in. (NVDA), (AMAT) and the (SOXX) are all down sharply and the character shift he is betting on is playing out fast.
Much of this action is driven by a combination of positioning for the second half along with a less bullish view of AI. There are still significant questions about capex and margins that were triggered by the blowout report from Micron (MU). Micron’s monopoly pricing power triggered a furious pushback by hyperscalers and others that are now looking for alternatives to soaring memory prices.
Next week investors will have some time to digest this volatility and will start looking ahead to second quarter earnings. We will start with the banks on July 14 and that will be followed by big tech names starting the week of July 20.
Strategy
My game plan remains largely the same. The focus on rotational action and biotechnology has worked well. However I have been a bit too cautious and raised cash from technology sales that I should have put into more biotech and other non-tech plays. My cash levels are high which gives me plenty of flexibility as we move into the pre-earnings period. I will work on being more aggressive with some new buys next week.
Happy Birthday to the U.S. We are lucky to live in the greatest country in the world. Have a great holiday and I’ll see you on Monday.
At the time of publication, DePorre had no positions in any securities mentioned.
