MarketSurge powers the charts in this video.
The selling in AI-related stocks accelerated last week. We can’t really say that it was sudden and surprising because there were warning signs. First, volatility increased substantially over the past month. We saw stocks moving down 30% in a few days and then just as quickly bouncing back to new highs. Short-term volatility is the highest at turning points, when momentum is lost. Then, we saw an AI-related gap and fade after record earnings from Micron – going down on good news is bearish price action. Then, Meta came out with a cloud platform to sell excessive compute, and the selling accelerated. This correction in AI is not the first. The group has gone through multiple storms that questioned the narrative – anything from China is ahead in AI to there’s too much capacity to there’s too much debt and shady deals. Guess what, none of those things mattered. Every time there was a selloff, we saw a big new contract or strong earnings report that rekindled the momentum in the space. Corrections to rising 10 or 20-week moving averages are constructive and allow for new base building. Obviously, this does not mean to be complacent and buy blindly into any dip. It is just an understanding that at this point, the current government is also heavily invested in the success of AI, and if things get worse, I would not be surprised to see the government taking 5-10% stakes in AI leaders for fresh cash inflows. This is just speculation, but not too far from reality. It is always best to wait for confirmation – bullish reversal candles before we risk any money in the space.
In the meantime, there has been a rotation into other sectors; not only the typically defensive, healthcare and consumer staples, but also the worst-performing groups of the past few months – aerospace, software, and crypto. If you think about it, laggards starting to outperform is actually a defensive sign, because it is likely caused by short covering – people are cutting risk on the short side after getting stopped on their long positions (likely AI-related).
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