The Information Was Fine. The Reactions Were Not.
The gloom is thick, but fundamentals are not the problem. Plus, an important reminder for investors after a trying week.
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Breadth was close to flat, and the DJIA managed a small gain, but the gloom was as thick as my wife’s beef stew. Outside of the Nasdaq 100 (QQQ) and the semiconductor sector (SMH) the numbers weren’t that bad, but many individual stocks saw bids disappear and key technical levels fail.
It caps a brutal week for the technology sector. Alphabet (GOOGL) fell into a bear market after a strong report, Tesla (TSLA) was hit by its spending, and the chip stocks whipsawed violently around mostly solid earnings news. The damage came fast, and it came without much regard for the quality of the underlying businesses.
This isn’t the type of action that is easy to quantify, but if you look at the action in your accounts, there is likely some clear evidence of stocks being sold out of disgust and dismay.
What is most consequential about this action is that it isn’t driven by some big shift in fundamentals. Capex spending is still the big story, but it’s unclear whether it will cause a sudden drop in forward earnings estimates. In fact it is more likely it will raise some of the longer-term numbers in the AI sector. Capex is being treated as a disaster when there is little proof that it is one.
Consider what actually happened this week. The companies reported mostly good numbers. Alphabet delivered some of its strongest growth in five years. Super Micro Computer (SMCI) booked a record backlog. Intel (INTC) was celebrated initially for its report. The information was fine. The reactions were not. When good news gets sold this consistently, the problem is positioning and psychology rather than the businesses themselves.
What we have is a mood shift that is producing poor price action, and that is scaring some folks who are taking evasive action. Stops are being triggered and it doesn’t much matter if fundamentals and valuation are still solid.
Stop Digging
My best advice is to take some stops and dump some names that are causing you stress. You can always buy them back and you might eventually find something you like much more. The focus should be on trying not to dig too deep of a hole.
Selling does not mean you were wrong about a stock. It means you are managing your capital in conditions where the market is not rewarding being right. If the fundamentals hold up, the stock will still be there in a week or a month, probably building a better technical setup than it has today. What will not come back on its own is capital that rides a broken chart all the way down.
This is a good time to remember the first rule of holes. If you are in one, stop digging. I guarantee you that great opportunities await, and the more capital you can protect the better off you will be.
Have a great weekend. I’ll see you on Monday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
