The AI Trade Isn’t Over, but the Easy Gains Likely Are
On Wednesday, I wrote that the negative reaction to the hotter-than-expected core CPI number might be a significant event that shakes up the market. It is far too early to conclude that we have a more positive market environment, but the action improved Thursday.
What was particularly interesting about the reaction wasn’t the severe selloff in many AI names but the positive reaction of bonds and interest rates. Rather than fall further on the CPI news, bonds bounced strongly.
That bounce in bonds helped produce some of the best trading we have seen in stocks in a while. Breadth finished on Thursday at about 65% positive.
Semiconductors, data centers and some other AI-adjacent names saw continued weakness at the open, but buyers showed up and had most of them well off their early lows. It is unlikely that this is a one-and-done selloff for the group. CPI may have triggered the aggressive selling, but it also revealed deeper issues: the need for massive financing and the likelihood of margin pressure.
The Rotation Begins
The primary issue going forward is whether the rotation into the stocks that have lagged for so long is going to pick up. I’ve been writing about the two-tiered market for far too long, and it is a nice change to see the iShares Russell 2000 ETF ($IWM) and the SPDR S&P Biotech ETF ($XBI) outperforming the Invesco QQQ Trust ($QQQ) and the Roundhill Magnificent Seven ETF ($MAGS).
The AI trade isn’t over, but the easy gains are likely behind us, and there will be more rotation within the sector as investors focus on profitability rather than growth. It is going to be instructive to see whether some of the AI names can rally on beat-and-raise quarters. That didn’t work last quarter, and there are likely to be plenty of folks looking to sell into strength.
Game Plan
My focus right now is on the transition that is taking place. New winners and losers are developing, and the best stocks going forward are not likely to be the ones that have been leading in recent months. I’m keeping an open mind and focusing on price action rather than valuations. As we’ve seen, attractive valuations in the chip sector did not provide technical support for the group, and now some of those valuations are being questioned.
As I discussed Wednesday, I’ve started increasing my buying, particularly in biotechnology, and I expect to be more aggressive as earnings season unfolds. I’ll have more about the status of names on my watch list soon.
Have a good evening. I’ll see you Friday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
