Tech Stocks Are Due for a Bounce, but the Market Might Not Care
We have under-the-radar bullish moves in many smaller stocks, earnings and a key inflation report that could all influence what happens next.
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Technology stocks are rebounding on Friday morning as investors await personal consumption expenditures inflation news. The recent technology correction has been the most aggressive since the bottom in 2023, with a drop of about 8% in just 10 trading sessions. Corrective action that occurs that quickly often produces some sizable counter-trend bounces. There was one mid-day yesterday that fizzled out, but there is another try early on Friday.
Bears have been anticipating some corrective action in the mega-cap technology names for a while, and so far, the rotational action into the rest of the market is developing very nicely, but the issue now is whether this shift in market character will gain further momentum - or does the market have some other surprises in mind?
We are awaiting substantial earnings reports next week that will impact the "Magnificent Seven" tech star stocks, but the immediate issue is the economy. The PCE report is due this morning and will likely produce a market reaction, but the main issue now is that there is clear economic slowing and increased pressure on the Fed to cut rates. A hot PCE number could be a problem for the Fed, but the view of many economists now is that the Fed is taking a substantial risk if it doesn’t move quickly to start cutting rates. The Fed has a meeting next week, which will help confirm its plans for September.
While the financial media is mostly focused on the big-cap technology names and the senior indexes, there is some very bullish action taking place under the surface. Biotechnology jumped more than 2% intraday before closing up close to 1% on Thursday. Energy, industrials, and many other sectors have good charts and relative strength.
Two things are powering this rotational action. First is technical conditions. The artificial intelligence technology and semiconductor names have become both extended and expensive. It didn’t matter for a long time, but now it does, and there is repositioning.
The second development supporting this shift is the growing confidence that the economy is slowing and interest rates are going to start falling. That is a boost to capital-intensive small stocks that have struggled with inflationary pressures to a much greater degree than their big-cap siblings.
A hot PCE report could cause some concerns this morning, but we have clear evidence of economic slowing, so it may not matter for long. It looks like they are anxious to bounce big-cap technology this morning, but the close will be the key to how far it can go.
At the time of publication, DePorre had no position in any security mentioned.
