Semiconductor Sell-Off Creates Powerful Rotation
Instead of causing concern, the selling in semiconductors triggered vigorous buying.
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Investors had a good excuse to dump stocks on Thursday when the Broadcom (AVGO) earnings report triggered sharp selling in the semiconductor sector (SMH).
Rather than cut exposure, there was a rush to buy the many stocks that had not been in a parabolic bubble. At the closing bell about 66% of stocks were in positive territory with the DJIA and Russell 2000 (IWM) leading the charge with gains of around 1.5%. The semiconductors dragged the Nasdaq 100 (QQQ) down for a loss of 0.5%.
The Magnificent Seven (MAGS) was on the verge of a technical breakdown out of a double top formation at the close on Wednesday but benefited from the rebound action on Thursday and is now holding key support.
FOMO Returns to Speculative Names
Apparently, I was not the only one who didn’t see that coming. There was the aroma of FOMO in the air, and speculative buying in small stocks surged once again with a long list of 10% movers. There were 190 new 12-month highs and 133 new 12-month lows. There have been quite a few swings between highs and lows lately due to large shifts in rotational action.
The big question now is whether the stocks that benefited from rotation can gain further traction. Many of them look attractive on both a technical and fundamental basis. The bears have been so caught up with their criticism of the frothy action in some of the AI names that they have overlooked how much of the market is actually healthy.
The biggest negative out there isn’t valuation or overbought conditions. It is possible negative catalysts like a sell-the-news reaction to Iran or a shift in liquidity when large IPOs hit. We also face sticky inflation and the possibility of a Federal Reserve rate hike. Any of these things could send investors to the sidelines but there is no way to know if or when they may matter.
Strategy
The strategy for now is to stay with stock picking and manage positions tightly. I’ve probably been a bit too cautious recently in my zeal to keep accounts close to highs but I feel well positioned to weather whatever may happen.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
