Momentum Monday – Tech Stocks Under Distribution

The new earnings season has just begun and semiconductors have already experienced a significant drop. The 3x long semiconductors ETF, SOXL went from 70 to 48 in a week. ASML gave the tone. They beat estimates but gave soft guidance, which led to a sector-wide selloff. Then TSM came and they beat the estimates, raised guidance and still sold off. 

Netflix reported subscribers well above the estimates and still declined. Such a catalyst used to be good for a 10%+ rally in the recent past. 

I don’t like to generalize about all stocks but so far it seems the good earnings in tech have already been priced in and expected. It will take a truly solid forward guidance to surprise the market. Any minor disappointment and weakness in earnings reports is currently getting punished harshly. This should not shock anyone given how extended the tech sector was just a couple of weeks ago and yet, the quickness in sentiment change has caught many unprepared.

There are quite a few big earnings reports next week that will shed further light on the state of tech – GOOGL, TSLA, TXN, NOW, IBM, etc.

QQQ seems headed for a test of its 50-day moving average around 470. SPY’s 50-day moving average is currently around 540. In the meantime, small caps IWM continue to show relative strength. IWM (small caps) and XBI (biotech) had a strong start to the week but fizzled in the second half. It is already trading below the VWAP since the CPI gap (July 11th), so I am not sure one should be excited about buying dips here either. Homebuilders (XHB, NAIL) and financials (DPST, BNKU) are holding better.

Caution time in the market. One must be more selective and nimble in the current choppier tape. Don’t be stubborn and complacent, believing that anything AI-related will eventually bounce so you don’t need to worry about the current dip. It might happen, it might not. Meanwhile, stops should be honored without questions asked. Keeping drawdowns small during choppy markets is a main requirement for quick compounding and account growth over time.

The silver lining is that correlations haven’t been this low in a long time. It’s a stock pickers market. The domination of the mega-caps in the past year and a half has concentrated everyone’s attention on a tight segment of the market. Most people remain focused on those few names. While no one is watching, there have been other more obscure stocks rising and building bases.