Use This Long Overdue Market Upset to Hunt for Opportunities
Watch out for new trends and themes to emerge as IBM, ServiceNow and other big earnings reports land, valuations are questioned, and inflation and other news hits.
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The corrective action that hit big-cap technology stocks has been anticipated by many investors for quite a while, but it is still surprising and shakes up sentiment. Suddenly, the artificial intelligence thesis that was warmly embraced for so long is being questioned, and people are reevaluating the valuation of the stocks that have been driving the most significant technology advancement since the internet boom.
The primary issue is whether this action is going to produce some new trends. Will the rotation into smaller stocks and the broader market continue? Have the Magnificent Seven names lost their mojo, and will they flounder for a while as they find support levels? Will some new leadership outside of technology emerge?
There is no shortage of catalysts to help drive the answer to these questions. First, we have many significant earnings reports to share. On Thursday morning, there were big moves in reports from Viking Therapeutics VKTX, ServiceNow NOW and IBM IBM.
The Nasdaq 100 QQQ and semiconductors remain under pressure, and there has been little interest in dip buying so far. A month ago, investors couldn’t wait to buy every minor pullback, but now there is some concern that valuations may be too high.
In addition to earnings, there is some significant economic news hitting. The second quarter gross domestic product will be out on Thursday morning, and the very important personal consumption expenditure-inflation news will be out on Friday. Next week, the Fed will announce its interest rate policy on July 31. There is unlikely to be a cut, but it is now nearly certain there will be two cuts before the end of the year. The main market concern is shifting from inflation to growth, which will impact rotational action as well.
Lower interest rates are likely to provide a tailwind for rotational action, but rotation will be very bumpy, and there will be plenty of counter-trend moves along the way. There was an example of this on Thursday when most of the market held up fairly well for most of the day but eventually gave in to the pressure and pulled back. There was still good relative strength outside of big-cap technology, but most stocks were in the red.
The market is at a juncture now where new themes and trends will start to emerge. So be ready to make some moves.
At the time of publication, DePorre was long VKTX.
