Tech Wreck Shows the Ugly Side of the Rotation
The question now is whether semiconductor and AI stocks have topped out and will have a hard time regaining momentum.
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Market players have been celebrating a powerful rotation into small-cap stocks over the last few days, but on Wednesday, the other side of the rotational action hit hard, and it wasn’t pretty. Technology stocks in the Nasdaq 100 QQQ suffered their worst day since December 2022, with a loss of almost 3%
Overall, the breadth wasn’t that bad, at about 3,400 to 5,900, as the Russell 2000 only dropped about 1%, and the DJIA actually managed to achieve a solid gain of 0.5%. Over 1,000 stocks managed to hit new 12-month highs during the day, but the list of stocks moving up by more than 10% shrunk to just 20.
Some of this movement is just a delayed reaction to the record-setting rotation into smaller stocks, but an additional catalyst was comments by the Biden administration that it is considering severe restrictions on companies such as ASML Holding ASML that are providing China with advanced technology. In addition, Donald Trump commented about reigning in Taiwan Semiconductor TSM.
Semiconductors, along with AI, have been the market leaders for much of 2024. The issue now is whether these groups have topped out and will have a hard time regaining momentum. A secondary issue is whether the weakness in technology will benefit small stocks that have already shown signs of escaping their long slumber.
It is an interesting brew of action and will be impacted by both upcoming earnings reports and further speculation about an interest-rate cut in September. The dramatic shifts in the presidential election are also shaking things up as the market contemplates the very real possibility of a Trump Administration in January and how that will impact the dollar, bonds, tariffs, and interest rates.
In view of the sizable of the move in the Russell 2000 IWM, some reversal action isn’t a big surprise, but the key issue now is how fast support will kick in. While the pessimists are looking for another small-cap failure, conditions are quite different this time as we move into the near certainty of interest-rate cuts.
Netflix NFLX will kick off earnings reports in the technology sector on Thursday night.
Have a good evening. I’ll see you Thursday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
