Semiconductors Rebound, But Can the Magnificent Seven Regain Its Crown?
Netflix earnings Thursday will be a good test of what the market is looking for when other big-cap tech names start to report next week.
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A very strong earnings report from Taiwan Semiconductor Manufacturing TSM on Thursday morning is offsetting the negative impact of ASML Holding ASML from earlier this week. The semiconductor sector is indicated to be about 3% higher early Thursday morning, although it is still below the levels it was at before the surprisingly poor ASML report.
Most of the market has ignored the semiconductor issue, and there has been a strong rotation into small-caps IWM. On Wednesday, the Russell 2000 had its highest close since November 2021 and it has seen its best relative strength of the year.
As we move into earnings season, the primary question is whether the rotational action into small-caps and financials will continue or whether big-cap technology and Magnificent Seven stocks will reclaim their crown as market leaders.
The recent underperformance by the Magnificent Seven (MAGS) has been a market positive as it has allowed the strength to broaden and for many lagging areas to finally catch up. For months, the indexes were riding strength in a small group of large-cap names. We now have a more typical bull market with strength across the board and more focus on finding good charts and good fundamentals. Investors can no longer hide in a couple of mega-cap names.
Netflix NFLX will be the first major technology company to post earnings for the third quarter when it reports on Thursday night. The stock has pulled back slightly from all-time highs, but expectations are high, and it will be a good test of what the market is looking for when other big-cap technology names start to report next week.
Small-caps have made big moves very fast, and many are now overbought and need consolidation. There has been a tendency for hard reversals in small-caps after good runs. Back in late July, the Russell 2000 fell nearly 10% in three days, which triggered a rotation back into the Nasdaq 100 QQQ.
One of the key issues in the next two weeks will be whether or not the Magnificent Seven and semiconductors can regain their leadership status as they present their earnings. AI has lost some of its luster recently, and the ASML earnings report indicates there are some issues.
With small-caps running hot, it is a very good market for stock picking, but it has become harder now after some giant moves. I’ll continue to hunt for opportunities that have not yet been found by the broader market.
We have a strong open for the Nasdaq due to TSM.
At the time of publication, Rev Shark had no positions in any securities mentioned.
