Surge of FOMO Takes Hold as AI Trade Comes Back to Life
Poor positioning and FOMO are driving this more than lower oil and rates.
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The market delivered a second straight day of big gains on Tuesday and both sessions shared a notable characteristic. Each was a steady trend day that closed near the highs with no meaningful pullback along the way. Breadth was strong at 70% gainers, the Nasdaq 100 (QQQ) jumped 3.5%, the semiconductor sector (SMH) surged 5.9%, and both the Russell 2000 (IWM) and the S&P 500 (SPY) added 1.9%.
Two consecutive trend days like that are unusual. Normal rallies are choppier. Buyers push, sellers push back, the market fades in the afternoon and recovers into the close. When that does not happen, and then does not happen again the following session, it tells you the sellers are sitting on the sidelines. Anyone who wanted out on strength is already out, so we end up with steady buying all day.
For three weeks the pattern was the opposite. Every Monday, early strength was sold aggressively and the dip buyers were trapped. That pattern shifted and the character change is evident in the price action.
Real Driver Is Mispositioning
Lower oil and lower interest rates are part of the catalyst, but the main thing driving this is that a lot of traders are caught leaning the wrong way.
The reaction to the mega-cap earnings reports last week was confusing and contradictory, with good reports sold and bad reactions reversed a few days later. A lot of money went to the sidelines during that stretch and a lot of positioning shifted into defensive names and away from anything with an AI association.
Those traders are now watching the names they abandoned run without them. That produces the fear of missing out, and FOMO is a powerful force in a market where leadership has been unclear for weeks. It also explains the trend days. When everyone needs to get repositioned and the pullback never arrives, they stop waiting for a better price and buy at market.
Palantir (PLTR) is the poster boy for this. The stock is up close to 30% after its report and it was one of the names left for dead during the AI carnage. A stock does not move 30% on a good quarter alone. It moves 30% when a good quarter arrives at a moment when everyone is underweight and the rush to get back in has to go through a small door.
The Question Is Whether It Continues
Two days of gains this broad put the market in a much better position than it was a week ago. Several things could shift the action from here.
The first is rates. Yields came down today and that helped, but the trend has been the other way. The 30-year closed last week at its highest level since 2007 and the 20+ Year Treasury Bond Fund (TLT) has been sitting near its lowest point in a year. Odds of a Federal Reserve interest hike by December run around 85%. If yields resume climbing, this rally loses one of its two supports.
The second is Friday’s jobs report. Estimates are looking for about 88,000 after June came in at 57,000 with downward revisions to April and May. A hot number revives the hike worry. A very weak number raises a different problem, which is whether the economy is slowing while the Fed leans hawkish.
The third is Iran. Oil fell sharply again on the diplomatic headlines, but Tehran and the administration keep contradicting each other about what has actually been agreed. We have watched crude run toward $100 twice this summer on escalations that arrived without warning. The premium came out fast and it can go back in just as fast.
The fourth is that none of the fundamental questions about AI got answered over the past two sessions. The capital spending debate is unresolved, memory pricing is still under threat from new competition, and the cost of financing the buildout keeps rising. What changed is positioning, not the facts. That is a legitimate reason for a move and it can carry further than skeptics expect, but it is a different thing from the problems being solved.
The fifth is seasonality, which turns unfavorable through October and argues that rallies will have a harder time sustaining themselves than they did in the spring.
What Would Confirm it
Investor’s Business Daily has been waiting for a follow-through day, which requires a strong advance on heavier volume than the prior session. Tuesday had the price action. Whether the volume qualified we will have to wait and see once the final numbers are in. It does not look like we had a sufficient surge in volume.
SpaceX (SPCX) reports after the close, its first quarter as a public company. The stock has been a fixture on the new-low list and it has bounced two days running. The reaction to that report tells us whether the appetite for speculative AI-adjacent names is genuinely back or whether this is confined to the established leaders.
Game Plan
I did not chase this and I am not unhappy about that. I still had some nice movers, my cash is high and my list is ready, and the setups I want are the ones that develop after a move like this rather than during it.
Precigen (PGEN), one of my favorites, just reported a blowout quarter. Papzimeos revenue came in at $53.1 million against a Wall Street estimate around $28 million, and more than double the $21.6 million it did in the first quarter. A launch that doubles quarter over quarter is not a company beating an estimate, it is a company forcing everyone to rework their models. I’ll be trading this aggressively.
Small-cap earnings are arriving in volume now and that remains where my attention is. The dispersion that showed up in the mega-caps will show up here with bigger moves, and the names that report well out of the group that showed relative strength through the selling are where the entries will be.
Two strong days do not resolve anything, but they do improve the odds. I would rather buy the first pullback in a market that is turning than the fifth day of a move I already missed.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long PGEN.
