Will the SK Hynix IPO Repeat the SpaceX Pattern?
As SKHY’s debut grabs the spotlight, the real test for the market starts next week with these three things.
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We have mild upside on Friday morning, but the action looks slow and a bit tired. Volume has been lighter and we have some random movement but mostly investors are just waiting for earnings season to start.
The primary news is the SK Hynix (SKHY) listing. The South Korean chipmaker raised $26.5 billion with the ADRs priced at $149 each. Shares in SK Hynix closed down 0.3% in Seoul ahead of their U.S. debut. The offering was more than seven times oversubscribed and should open well above the set price.
Will SKHY Follow the SPCX Pattern
The big question is whether SKHY puts the chip stocks back into an uptrend as we move into earnings or whether it creates sell-the-news pressure like the SpaceX (SPCX) IPO did.
There will likely be an initial chase by buyers who did not get allocations. With SPCX that lasted about three days before the stock rolled over. SpaceX hit a post-IPO low on Wednesday.
The difference is that SpaceX was of much more interest to retail investors. SKHY is an institutional deal. Three big funds, Baillie Gifford, Coatue Management, and Situational Awareness Partners, took roughly a quarter of the offering between them. Those are not fast money accounts looking to flip on day one.
With fewer retail investors chasing that means a smaller initial spike but it also means less flipping and immediate supply hitting the market. The sell-the-news pressure, if it comes, may develop over weeks rather than in the first few sessions.
The deal is priced at $26.5 billion rather than the $28 billion, which was the original target, despite being seven times oversubscribed. They left some money on the table because they either wanted a tighter float for strong price action or the demand at the top of the price range was thinner than the oversubscription number suggests.
Small-Caps Are Basing While Biotech Holds Up
The Russell 2000 (IWM) has fallen in four of the past five sessions and the momentum indicators are rolling over. The small-cap strength that helped breadth earlier this week stumbled the last two sessions and is stalling. The group is basing rather than breaking down but it needs to hold here and we need to watch breadth.
Biotechnology remains the exception. The group continues to act well and has not given back much despite being extended. The biotech names with their own catalysts are still working and I’m sticking with them.
The Setups Coming Next Week
Next week is when news flow will pick up and we’ll have some clues about the market transition.
Kevin Warsh gives his semi-annual congressional testimony on Tuesday. That is his first public questioning as Fed Chair and will provide some interesting insight into his thinking.
The New York Fed consumer survey showed inflation expectations hit their highest level in almost three years last month, but oil is jumping around and that is having an impact. If Warsh talks about “inflation expectations becoming unanchored,” it will push rate hike probabilities higher. They have been steadily climbing since his first meeting and that could be a catalyst for more corrective action.
The banks kick off earnings season on Tuesday as well. They will set the tone for whether the market can build on current levels or whether the pressure that has been hitting technology spreads into other sectors.
Delta Air Lines (DAL) reported Friday morning and provides some insight on the consumer and on how the crude move is hitting airline margins. Airline stocks were hit Wednesday when oil spiked.
Big tech follows the week of July 20. That is when the chip pricing power question and the hyperscaler margin questions are addressed with actual numbers.
Strategy
I am not making any big moves. I am focused on protecting gains and trying to pick off a few shorter-term trades while we wait.
My cash levels stay high. The setups I want are going to appear during earnings season when reports create dislocations. Stocks that get hit on a disappointing number and then find some new support. Stocks that gap higher on a strong report and hold the gain. Neither setup exists yet in any size.
The SKHY listing will produce some chaotic action Friday but I expect elevated volatility rather than a sustained trend. I have no interest in chasing it.
What I am watching into next week is whether the small-caps hold their base, whether biotech can consolidate without giving back the gains, and whether Warsh says anything Tuesday that changes the interest-rate picture. Those three things will tell us more about the next month than anything that happens in the chips Friday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
