The Screens Look Worse Than the Breadth
Ugly action in technology is dragging down names that have nothing to do with AI.
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Semiconductor stocks, growth names, and speculative small-caps are getting hit hard Tuesday morning but rotation into defensive sectors such as pharmaceuticals, utilities, and consumer goods is pushing breadth close to even. The focus is on the carnage in many technology names and how unsettled the AI sector has become.
There are 227 new 12-month highs against 159 new lows. On a day that looks like this on the screens, more stocks are making new highs than new lows. That is the whole rotation story in one glance. If this were a broad market breakdown the new lows would be piling up quickly and the highs would have disappeared. Instead the money leaving technology is finding somewhere else to go. That is not bear market action.
In my opening column I discussed the various factors that are converging to hit AI. The latest and biggest worry is that forward estimates may be wrong. If those estimates are correct then we shouldn’t be seeing action this ugly in places, but there are growing doubts about the pricing of chips and the cost of data centers.
Why the Innocent Victims Get Hit
The pressure on technology and AI is spilling over into other areas Tuesday but there is still enough rotation to cover it up to a great degree.
The good news is that this is an emotional market and that is likely to lead to mispricing in certain areas. I see a number of stocks under pressure Tuesday that have nothing to do with AI or technology but they have benefited from speculative interest and they are getting dumped without regard to merit because there is the growing aroma of fear.
The mechanism at work is that speculative capital is the same capital regardless of what it is invested in. When traders take losses in the AI names they raise cash wherever they can, and what they sell is whatever is liquid and whatever is showing a profit. Their biotech position did not become less attractive this morning. It just happens to be the easy group to sell because it has performed well lately.
Biotechnology is one of the victims of speculative dumping Tuesday with leaders such as Revolution Medicines (RVMD), Abivax (ABVX), and Definium Therapeutics (DFTX) taking hits. These are names I’d like to add but I don’t do it on a day like this.
The Fed Matters More Than Usual Wednesday
The rate decision Wednesday afternoon carries more importance for the AI names than a Fed meeting normally would. One of the four problems I outlined this morning is that the cost of financing the buildout is rising, with the 10-year bond touching 4.7% last week and hyperscaler debt spreads widening. Meta Platforms (META) just paid significantly more for its Texas data center offering compared with a similar deal a year ago.
Rates are usually a macro issue that affects everything to some degree. Right now they are a direct input into the AI thesis, because the entire buildout requires enormous capital to be financed. A hawkish surprise from the Fed would hit the exact problem that is already cracking, and it would land the same afternoon Microsoft (MSFT) and Meta report their spending plans.
That combination is why I am standing aside and have no interest in betting on the outcome.
Game Plan
I’m focused on my watch list and staying vigilant but I see no reason to act at this point. The stocks I want are getting cheaper and there is no reward for being early into a Fed decision and two mega-cap reports.
The names being sold without regard to merit are the ones to have ready. Emotional selling does not stop at fair value and it rarely reverses on the same day it starts.
At the time of publication, Rev Shark was long RVMD, ABVX and DFTX.
