Why I’m Looking to Add Exposure After the Nasdaq’s Worst Day Since June
Thursday’s selloff isn’t a signal to cut exposure. It is a signal to look where the money is going.
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On Thursday, the Nasdaq posted its worst day since June as the AI sector collapsed following reports from Meta Platforms (META) and Tesla (TSLA). Worries about capital spending and profitability had been brewing, and the earnings reports triggered a sell-the-news reaction.
The money coming out of the AI names didn’t leave the market, though. It rotated into other areas of the stock market and into bonds.
The Invesco S&P 500 Equal Weight ETF (RSP) gained 0.86% while the Invesco QQQ Trust (QQQ) dropped about 3%, and breadth was close to even. There are few days in market history when the QQQ dropped 3% while the equal-weight S&P 500 posted a positive return. Similar days showed up in the spring of 2000, when the internet bubble burst and money ran from tech into the rest of the market.
IBD’s Blind Spot
After the close, Investor’s Business Daily cut its suggested market exposure to 20% to 40% because of the higher-volume selloff and another distribution day. IBD’s timing model looks only at the major indexes, so it ignores the equal-weight index and breadth. To me, that is a serious flaw in a market like this one.
Index-based timing works when the indexes reflect what most stocks are doing. Generally, there is a correlation between the indexes and the average stock, but that has not been the case in recent months.
Currently, a handful of AI mega-caps make up such a large share of the S&P 500 and Nasdaq that the indexes mostly reflect what those few stocks are doing. When those leaders are the ones being sold, and the average stock is going up, a model built on the cap-weighted indexes tells you to get out right as money is moving into the rest of the market.
The opportunity is in the groups that are benefiting from the rotation. Rather than cutting exposure, that is where you should be looking to increase it.
Meta Shows the Problem
The Wall Street Journal has a piece this morning on Meta’s (META) Muse AI agent that helps to identify the key issue behind the selling. Muse is a hit. More than 10 million people in the U.S. and Canada downloaded it in just over a month, about three times as fast as ChatGPT reached that mark. But it isn’t anywhere near profitable enough to pay for what Meta is spending.
Even if Muse reaches 100 million users next year paying $20 a month, it would add about $24 billion of annual revenue. That is roughly 12% of the nearly $200 billion in capital spending analysts expect from Meta next year, and Muse has only about 2.5 million daily active users right now.
Meanwhile, the spending is outrunning the cash. Meta’s free cash flow was negative $2.1 billion in the third quarter, and the FactSet consensus has it falling to negative $14.1 billion in the fourth quarter. Long-term debt has jumped from $28.8 billion at the end of 2024 to $80.9 billion. On Wednesday, Meta also created a new class of nonvoting shares, which sets the stage for raising money by selling stock later. That spooked investors, and the stock fell almost 7% on Thursday.
The AI products work, and people are using them. But the payoff is a long way off, and the bills are coming due now. When Meta, one of the most profitable companies in the world, has to borrow heavily and set up a way to sell more stock to fund its buildout, investors are right to ask what all this spending is going to return.
Oil Hit the Leaders This Time
The continued climb in oil prices was also part of the problem Thursday, and it probably helped speed up the AI selling. But this time higher oil didn’t hit the rest of the market much harder.
For months, oil and interest rates were minor issues for the AI names while they weighed on everything else. Thursday it was the other way around, which shows how much rotation is now driving the market.
SpaceX Moves Into Wireless
We have mild action early Friday as investors digest what happened. SpaceX (SPCX) is higher premarket after Bloomberg reported that the company is looking to secure at least 80,000 cell sites across the U.S. as part of an effort to build a wireless carrier.
AT&T (T) and Verizon (VZ) are both down more than 3% on the prospect of more competition. It is a reminder that SpaceX is more than an AI story, and that its ambitions reach into businesses that have been comfortable for a long time.
Game Plan
My game plan is to focus on the names benefiting from the rotation. This week, that has meant small-caps, biotechnology, retail, defensive pharmaceutical stocks and the banks. The rotation is still at an early stage, and it is chaotic, but there should be improved price action and better charts as it develops.
I’m not interested in bottom fishing the broken AI names. I want to find the stocks the rotating money is going into, and build positions in them as their charts confirm the move. IBD is right that there is exposure to cut. It is in the AI sector, not the rest of the market.
At the time of publication, Rev Shark was long SPCX.
