Category: Uncategorized

MarketSurge powers the charts in this video.

The stock market price action might seem irrational at the extremes, but there’s a method behind the madness. Take the biggest force of the past three years – AI has changed many companies’ destinies. Software has been under pressure over the past few months because the market has realized that AI could depress software companies’ margins, and therefore, they should trade at lower multiples. The odds are that the days when SaaS stocks can trade at 20, 30, 50 times their sales are gone. Since AI is likely to improve the margins for most other industries (productivity rises, fewer employees are needed), they might deserve to trade at higher multiples. This can explain the rotation into industrials, energy, financials, and transportation stocks year-to-date. 

In the meantime, the only stocks that are receiving favorable market treatment when they report earnings are AI infrastructure stocks. The vast majority of them gapped up this season. It is a different question that some have not been able to keep their gaps. When the general market is weakening, sooner or later, all stocks are impacted. Keep in mind that the employment growth is at levels typically only seen during recessions. Maybe this is why the major indexes have been piling up distribution days lately, and defensive sectors like consumer staples and utilities are showing relative strength.

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The latest reactions to tech earnings haven’t been bullish at all. Google crushed earnings estimates and gapped down. Palantir crushed estimates, gapped up initially, and then sold off quickly. Amazon missed earnings estimates and gapped down. AMD beat the estimates and sold off. META beat earnings estimates, gapped up, and quickly sold off. Upside gaps were used for profit-taking. Slight missteps were punished harshly. The only thing all big tech companies had in common this earnings season was announcing a significant increase in capex spending. This explains the relative strength in semiconductors and industrial stocks – anything needed to build AI data centers. 

While tech and crypto have been under significant pressure lately, energy, regional banks, industrials, transportation, and consumer staples are making new highs. This is why I can’t really call the recent carnage in the market a correction. It is more of a sector rotation. 

Then why are the headlines scary, and so many people are running away from the market and raising cash positions? Tech outperformed by such a large margin in the past 20 years that it has become “the market” in terms of market cap and capturing people’s attention. Everyone’s portfolio is tech-heavy, so a correction in tech is felt much harder by most.

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MarketSurge powers the charts in this video.

In the scope of two weeks, the Nasdaq 100 went from breaking below its 50-day moving average on EU tariff threats to making new all-time highs back to dropping near its 50-day. In the meantime, former leaders like HOOD, SHOP, PLTR, APP, RDDT, and many others are getting pressured below their 200-day moving average. Volatility and divergences tend to increase at turning points. 

The one trend that has persisted since last December is strength in semis and weakness in software. The thesis is that AI benefits the former and can harm the latter. This theme accelerated in January. Microsoft’s earnings took the software group down further. The semiconductor ETF, SMH, went more than 20% above its 50-day moving average, so it is normal to see a pullback in the following weeks.

The momentum high flyers that seem to defy gravity finally went parabolic. Silver, gold, memory chip, and space exploration stocks dived from their all-time highs, bringing extra havoc and opportunities:

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