The Setup Bears Have Been Waiting for Is Here
Here are the three things that triggered the selling, what to watch now and my strategy for this difficult market.
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I wrote Monday that I did not like the feel of the action and had raised cash levels to an average of 45% for my clients at Hammerhead Financial Strategies. The selling is hitting hard on Tuesday morning.
The artificial intelligence trade has gone into reverse, and the selling is global. Nasdaq 100 futures are down 2.8% in premarket trading. South Korea’s Kospi closed down 10% overnight, triggering a circuit breaker. Japan’s Nikkei dropped 3.55% and broke an eight-session winning streak. The Europe Stoxx 600 Technology index is down 3.1% with ASML Holding (ASML), ASM International (ASMIY), and STMicroelectronics (STM) all down between 5% and 7%.
The damage in the U.S. premarket is concentrated where the rally has been concentrated. Nvidia (NVDA) and Alphabet (GOOGL) are down roughly 3% each. Intel (INTC), Marvell Technology (MRVL), and Advanced Micro Devices (AMD) are off between 5% and 7.5%. Micron Technology (MU) is down 8.6% ahead of its earnings report Wednesday. SpaceX (SPCX) is down 4.5% on top of Monday’s 16% collapse. SPCX is now breaking its post-IPO low and the $135 IPO price is in play.
3 Pieces Aligned Overnight
The selling pressure has been building for a while and was triggered by three things.
First, South Korea was not added to MSCI’s Developed Markets watchlist during the annual review. That had been the catalyst driving some foreign inflows into Korean chip names. With no upgrade now possible until June 2027, the Korean AI thesis lost key support. The Kospi had been up nearly 95% year-to-date before Tuesday’s plunge, which is the sort of parabolic move that reverses hard.
Second, John Jumper, who won the Nobel Prize for AI research, announced he is leaving Alphabet’s Google subsidiary to join Anthropic. That is the most significant brain drain signal in the AI space this year and was the trigger for some of the U.S. selling on Monday. The market sees it as an indication that the hyperscalers are losing the war with pure AI plays and that profitability will be problematic.
Third, SpaceX disclosed plans for a bond offering to fund operations. Even the IPO darling cannot fund its growth without leveraging the balance sheet, which fits the pattern Oracle (ORCL) and Super Micro Computer (SMCI) stumbled on earlier in June. The need for capital is the story that drove the early-June selling and applies to every name in the AI group.
The Setup We Have Been Watching
The negative catalysts I have been describing for two weeks are now hitting. The major catalysts are behind us. The Iran deal is signed. The SpaceX IPO has traded. Kevin Warsh has held his first meeting and delivered a more hawkish message than the market expected. Valuation concerns have been building. Breadth has been narrowing. The Magnificent Seven (MAGS) is now at levels last seen more than two months ago.
Bank of America strategist Michael Hartnett has been warning that June could be difficult. When CPI stays above 4%, the S&P 500 has historically fallen around 4% over the next three months and 7% over six months. The current setup of high inflation plus a tight labor market plus a Fed preparing to hike has historical precedents in 1966, 1973, 1990, 2000, 2008, and 2021. Each was a difficult period for stocks triggered by high CPI readings.
Oil is staying down after the Trump administration waived oil sanctions on Iran for 60 days. The 10-year Treasury yield slipped to 4.48% and the dollar hit a one-year high on safe-haven demand. The iShares Bitcoin Trust ETF (IBIT) slipped roughly 2%, reflecting the risk-off mood. Lower oil is helping marginally but not enough to offset the inflation worry into Thursday’s release of May Personal Consumption Expenditures, the Fed’s preferred inflation gauge.
The Micron earnings report Wednesday is the next major news event. The stock is up 831% over the past year and the bar is set for perfection. The Korean memory companies were just crushed overnight, although, like Micron, they appeared fairly cheap given their strong growth. A disappointment or a soft guide is going to generate a big move. A clean beat may not be enough to stop the selling, given the conditions that are developing.
Strategy
My defensive posture stays in place. My cash levels are at 45%. I am selling laggards into any bounces and not adding to positions that have run hard. The price action is in the phase where the selling can feed on itself because there is no obvious buyer of size and no near-term catalyst that would create one. Dip buyers are likely to be punished until the technical setup stabilizes.
The opportunity in markets like this is to stay disciplined while the impatient capital gets punished and to wait for the conditions that justify aggressive positioning later. The biotech names that worked Monday and last week may continue to work because they are not tied to the AI infrastructure unwind. The rotational action is where the opportunity lies, not in chasing index direction or trying to call the bottom on the AI names.
This is not a market for momentum chasers or index buyers. It is a market for risk managers and stock pickers with the patience to wait for the next setup. The defensive posture has been working through the past three months and the conditions are giving us a clear reason to stay with it.
Tighten your seatbelts and adjust your trading goggles. It is going to be a bumpy ride.
At the time of publication, Rev Shark had no positions in any securities mentioned.
