Google, Tesla Face Increasing Risk After Market Bounce
The market delivered some energetic bounces on Tuesday with chips, technology and other technically broken names leading the way. Korean markets surged overnight, chip names rallied globally and the dip buyers who have been sniffing at the wreckage finally got a day of follow-through.
The problem with bounces like this is that V-shaped recoveries are low-probability events. Stocks that have suffered severe technical damage almost never go straight back up. The normal pattern after the kind of destruction we saw in the chips over the past two weeks is a bounce, a retest and a period of base-building before a sustainable uptrend can develop. The traders betting on a straight-line recovery are betting on a low-probability event.
Bounce Raises Stakes for Upcoming Reports
The bigger issue is what this bounce does to sentiment heading into the earnings reports. Alphabet ($GOOGL) and Tesla ($TSLA) report Wednesday night along with IBM ($IBM), ServiceNow ($NOW) and Texas Instruments ($TXN). Intel ($INTC) follows on Thursday.
For two weeks, the selling had been resetting expectations to lower levels which creates better odds of a positive reaction to reports that are just ok. A market that expects little is easier to please. We now have a greater risk of a sell-the-news response even to decent numbers. We saw exactly that pattern with Micron ($MU), which delivered a blowout report and topped the same day.
The reports themselves will be fine in most cases. The danger is not the numbers. The danger is elevated expectations and worries about capex and margins.
Inflation Pressure Building Again
The other development that presents a problem is the action in oil and bonds. Crude moved up sharply again with WTI approaching $84 and Brent above $90. Gasoline at the pump is averaging over $4 nationally, up from about $3 before the war started. Bonds moved lower and yields ticked up.
That combination says inflation fears are rising again, and rising inflation fears are not conducive to a sustained market advance. The rate-hike odds have been climbing for weeks, the Fed has named AI spending as an inflation driver, and now energy is adding fuel. A market trying to rally on hope while oil pushes toward $90 and yields climb has some hard work to do.
Strategy
I have bought a few broken names that I think may have some support but I’m not chasing bounce action. The risk-reward of buying broken names after a two-day rally, in front of binary earnings events, with inflation pressure building, is poor. The probabilities favor patience.
The names I am watching continue to be outside of technology. The biotechnology group acted well again and several of my favorites are acting quite well. If the earnings reports produce the volatility I expect, there will be dislocations worth trading in the days that follow. That is where my focus stays.
Wednesday night we will see a few fireworks. Until then, the bounces in the broken names are entertainment for traders rather than an opportunity.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
