Hope Boosts the Market, But High Stakes Earnings Create Risky Dynamic
The market is enjoying a strong bounce early Tuesday morning, driven by hope on two fronts. There is hope for progress in Iran, and that the big technology earnings reports, which start hitting Wednesday night, will confirm that the recent selling was overdone.
The Iran hope comes from a report that Tehran has received a proposal from mediators for a 10-day ceasefire. Oil prices weakened slightly on the news but bonds have seen little response.
The situation remains a mess. The U.S. has now carried out 10 consecutive nights of strikes, Yemen’s Houthis have announced a blockade of Saudi shipping, and President Trump has promised that Iran will pay “many times over” for the deaths of U.S. servicemembers. The oil market is not moving much but equity investors are choosing to be hopeful of positive developments.
The Global Chip Rally
The earnings hope is more pronounced in the chips and technology. The bounce is global and sizable.
The Korean Kospi gained 3.6% overnight with Samsung up more than 6% and SK Hynix up 4%. Taiwan’s market rose 4.2% with Taiwan Semiconductor up nearly 4%. Japan gained 3.2% with SoftBank jumping 6%. In the U.S., Micron ($MU) and Intel ($INTC) are both indicated sharply higher. After the group fell into bear market territory last week, this is the strongest snap-back attempt yet.
Nebius ($NBIS) in the data center sector is a good illustration of the mood. The stock is up around 7% after Nvidia ($NVDA) formally disclosed a 9.3% stake in a regulatory filing. The underlying $2 billion investment was announced back in March, so there is nothing new but it gives buyers strong justification to chase a dip.
A beaten-down name that is rallying hard on the disclosure of old news is an illustration of how oversold the group is rather than a celebration of not-so-new news.
The Stakes for Wednesday Night Are Increasing
The most interesting thing about this rally is the timing. It hits the day before Alphabet ($GOOGL) and Tesla ($TSLA) kick off the mega-cap reports, with IBM ($IBM), ServiceNow ($NOW), and Texas Instruments ($TXN) reporting the same night and Intel following Thursday.
For the past two weeks the question has been whether the severe selling reset expectations enough to change the reaction to the reports. A big rally in front of the reports partially undoes that reset. Buyers are pumping up expectations before a single number has been released. If the reports don’t deliver, the risk of a retest of recent lows is a near certainty.
There is also genuine confusion about what good news even looks like. Two weeks ago Taiwan Semiconductor ($TSM) was sold after a beat because it raised its capex guidance and the spending worried investors. Now some strategists are arguing that strong capex guidance from Alphabet would be bullish for the chips. When the market cannot decide whether big spending is good news or bad news, volatility is likely to stay high while the issue is sorted.
My Strategy
I am not chasing this bounce and have no interest in betting on the reaction to the earnings news. Hope-driven rallies in front of binary events are the kind of action I prefer to trade after the fact rather than before. The dip buyers who rushed in Monday morning were trapped within 15 minutes. This gap is bigger and the high risk Wednesday night is unchanged.
My focus stays on the setups that are developing away from technology. As I mentioned here Monday, there are quite a few good chart formations. The biotech names on my list continue to act well and I will add to favorites on the right action. If the reports come in strong and the market confirms the move with good breadth and follow-through, there will be plenty of time to increase exposure.
If you want to gamble you can bet on the earnings reports but if you are looking for prudent speculation you trade the reaction after the news.
At the time of publication, Rev Shark had no positions in any securities mentioned.
