The Rotation Out of AI Plays Out
The setup I have been describing for two weeks is now playing out. Here’s my best advice.
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It was a messy day of action, as semiconductors (SMH) fell around 7% and the Nasdaq 100 (QQQ) lost 3.2%. Despite the ugliness in the technology sector, overall market breadth was positive with about 51% of stocks in the green. Consumer Staples, Health Care, Biotechnology, Financials and Homebuilders benefited from rotational action.
Rotation Rather Than Run for the Exits
From an index standpoint, this looks like some routine corrective action, but it is more of a rotation than a run for the exits. The AI sector and adjacent areas are having their valuations questioned, and there are plenty of other places that aren’t as extended or as chaotic that look safer at this point.
The key issue is whether corrective action in the leading areas of the market will eventually cause broader damage. The setup I have been describing for two weeks is now playing out. The major catalysts are behind us, valuation concerns have been building, breadth has been narrowing, and the Fed is preparing the ground for hikes rather than cuts.
I have been raising cash and trading tightly for exactly this kind of action. What I did not expect was the intensity of the rotation away from AI rather than a broad market run for the exits. I expected the meltdown in chips would send buyers to the sidelines but they barely flinched as they jumped into biotechnology and other groups that were not extended.
I expected to take a hit on a day like this but benefited instead from the strength in biotech, which is my highest weighted sector exposure. The defensive posture worked, and the rotation gave the active money a place to go that is not chips.
Strategy
My best advice here is to make some adjustments and do not just sit and hope that the technology names that are being beaten up will come roaring back. There are not a lot of catalysts on the horizon right now and the questions about AI profitability and capital expenditures are still building.
The conditions I have been describing are now reinforcing themselves. The selling in AI is creating supply that needs to be absorbed before the group can find footing, and the rotation is creating new leadership in places that were ignored when the AI trade was running. Review your positions and make sure you have a plan for them.
Action like this can be painful if you are caught in the wrong groups. The good news is that this is how new opportunities are created. Investors are hunting for some new ideas and once they find them there could be some sustained momentum.
Don’t forget we have the Micron (MU) earnings report after the close on Wednesday, which is going to cause additional volatility in the AI and chip sectors. I’m avoiding them entirely and am focused on other sectors.
Have a good evening. I’ll see you Wednesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
