Apple and Palantir Slip, but the Focus Is on Rotation and the Election
Both Apple ($AAPL) and Palantir Technologies ($PLTR) are trading lower early Tuesday after beating on both the top and bottom lines. But the weakness is isolated, and it isn’t spilling over to the rest of the market. That is a good sign.
This tells us that investor focus is shifting to individual stocks, valuation and rotation. Weakness in a couple of big names isn’t dragging everything down like we saw last week, when the entire market was hit hard Friday.
Apple’s Margin Problem
Apple is down more than 4% premarket after management said margins will shrink. The company beat on sales, but CEO John Ternus, who took over from Tim Cook in September, said memory-chip costs are squeezing profits. “What we’re seeing with memory pricing right now is unprecedented,” he said on the call.
Apple softened the blow last quarter with a stockpile of cheaper components it bought earlier, but that supply is running out, and it expects memory costs to keep rising. It has already raised prices on some products twice this year.
The Wall Street Journal makes the same point I made last night: Apple has been a safe haven from the AI spending story, but safety isn’t cheap. When a stock is priced that richly, any hint of shrinking margins gets punished.
However, what is bad news for Apple is good news for the companies that make memory chips. Higher memory prices are helping lift the chip stocks Tuesday morning, with the VanEck Semiconductor ETF ($SMH) up 1.8% early.
A Choppy Rotation
Monday reminded investors how bumpy this rotation is. The Nasdaq Composite rallied as much as 1.4% early and then reversed to close down 1.1%. SMH was up nearly 2% early and finished down 2.7%, closing just below its 200-day simple moving average after a 7% drop Friday. Oil was the big help, with West Texas Intermediate crude falling nearly 8% to about $96 a barrel on hopes that President Trump will favor diplomacy over new strikes on Iran after the midterms.
Advancing stocks beat decliners on the New York Stock Exchange by almost 2-to-1, and the money keeps finding new places to go. PulteGroup ($PHM) jumped another 5% as the 10-year Treasury yield slipped to 4.91%. Homebuilders are a rate-sensitive group that has been ignored during the AI boom, and PulteGroup is up about 16% since it reversed higher on earnings on Oct. 22.
The bigger picture shows how much rotation there has been. In October, the S&P 500 Equal Weight Index, which gives every stock the same weight, gained 4.8% while the S&P 500 slipped about 0.9%, according to the Kobeissi Letter. That 5.7-point gap was the largest monthly margin for the average stock since April 2009. AI stocks fell more than 13% during the month.
Election Day
The big question now is how the market reacts to Tuesday election. Control of Congress is on the line, and the Senate, in particular, will shape how President Trump proceeds with his agenda, which has broad economic ramifications. Data centers are even on the ballot in some places, as communities push back on the AI buildout.
The market appears to be pricing in gridlock, but if Democrats do better than expected, or the party’s progressive wing gains ground, it could trigger market concerns.
Game Plan
I’m continuing to watch for improved technical action. The rotation has been strong, but it is choppy and inconsistent, and that makes it difficult to build core positions. Once the election is out of the way, we should get more clarity, and we also have the potential for a seasonal boost.
My best advice is to watch the groups with the best relative strength and see whether they can develop momentum and leadership. I’ll be looking far and wide for better charts, but I’ll move slowly in putting cash to work.
At the time of publication, Rev Shark had no positions in any securities mentioned.
