The Age of the Mag 7 Has Ended
AI is alive and well, but a new crop of leaders will emerge.
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The indexes finished the day on Thursday with relatively minor moves, but the underlying action was significant and indicative of a significant shift in the AI trade. The story of the day wasn’t the blowout earnings from Micron Technology (MU). The story was that investors were forced to recognize that the buyers of all those chips have some significant problems with profit margins and capital spending.
Micron has monopoly pricing power in memory and its profits are produced at the expense of the Magnificent Seven names that are the buyers. While the VanEck Semiconductor ETF (SMH) jumped 2.3%, the Roundhill Magnificent Seven ETF (MAGS) slumped 2.8%. This isn’t a new story. It has been evident for a while but what changed on Thursday was that the market more fully embraced the problem.
The big question now is whether this is a major turning point or just a short-term problem. Many tech investors are hopeful that we are seeing a dip buying opportunity, but the likelihood that we will see the Mag 7 regain the sort of momentum they experienced earlier this year appears remote. The greater likelihood is that strength will be used as an opportunity to sell rather than a catalyst for FOMO.
Mag 7 Is No Longer the Leader
I don’t want to sound too negative. There will continue to be plenty of opportunities in the AI area but it is no longer the age of the Mag 7. There will be new leaders in the group and those leaders are not the ones that are desperately buying high priced memory.
The healthiest aspect of this market is that the money coming out of Mag 7 and foundational AI plays is rotating aggressively into other areas. Even when the market has been poor lately, breadth has been fluctuating around flat and there has been some strong relative strength in groups outside technology.
Strategy
My best advice is to focus on relative strength and to dump the names that are lagging. We don’t have any immediate catalyst to drive big reversals in the things that are struggling and seasonality will make rebounds more difficult. Lower prices are not a good argument for buying a broken chart.
Selective stock picking is working but the emphasis is on “selective” and it is also important to use shorter time frames in this environment. A significant shift is taking place in the market and flexibility is key.
Have a good evening. I’ll see you Friday.
Position: None
