Semiconductor Weakness Weighs on the Market
Earnings news from Samsung caused a selloff in semiconductors which sparked broader market weakness on Tuesday. Breadth dropped to around 38% but there were still some sectors benefiting from rotation. Biotechnology ($IBB) remains the star of the show with another jump of over 1% to a new all-time high. Despite the weakness in the indices there were more than 230 stocks hitting new highs.
Oil added to the market instability. Crude bounced 5% on Tuesday after the U.S. moved to revoke the general license that had allowed Iran-related oil exports. The Iran situation moved from de-escalation back into escalation this week and the market has to contend with some renewal of inflationary pressures as a result.
Bonds are also under pressure and yields are ticking higher. The iShares 20+ Year Treasury Bond ETF ($TLT) is back to May levels and looks technically poor. The bond market is signaling that the inflation issue has not gone away. That is another headwind for the AI infrastructure names that had been counting on lower rates to support their capex spending.
It is AI infrastructure that is the primary problem. This is the group that carried the market for much of the past year but investors are concerned that their high margins and pricing power may not be sustained. That is bad for suppliers but not so bad for buyers. Interestingly the hyperscalers are benefiting and the Magnificent Seven managed to stay close to flat as the rest of the AI sector struggled.
Dip buyers have been trying to catch a turn in some of the broken AI-adjacent names and are not having much luck. Dip buying always seems like a great idea when stocks are strong but once they roll over and start making lower lows, they lose their appeal. The bounces are increasingly short lived and are now viewed as opportunities to sell and reposition.
I have no interest in trying to catch a bottom in chips, data centers or other AI infrastructure plays at this stage. These groups aren’t dead, but I expect them to languish for a while.
Biotech Continues to Work But Is Getting Extended
What is working is biotechnology but they have been so hot that I’m growing a little concerned. One of my favorite names and the largest position in client accounts at HammerHead Financial Strategies is Xeris ($XERS). Since the beginning of June it is up almost 50% and the air is a bit thin up here. I still believe the stock is fundamentally cheap but it is going to need a rest sooner or later.
Strategy
My best advice right now is to make sure you have sufficient cash to give you flexibility and don’t let poor-acting stocks drop too much before you take action. Take a look at every stock you own and decide on a course of action. Don’t stick your head in the sand and ignore the ones that are acting poorly. Removing a poor stock from your screens is empowering and you’ll wonder why you didn’t do it sooner.
The good news is that we are getting a bit of a shakeup and that is what we need for more and better opportunities. With earnings season coming soon there will be some interesting developments.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long XERS.
