Market Outlook
Last week, the kool-aid the market has been drinking for the past year about the AI trade has started to sour a bit. While in the past, the big tech and semi names were passing money around to boost there share prices as investing in AI was the cool new thing. Reality is starting to set in that, sure AI is a great and we all use it but at the end of the day, business need to make money.
Intel, Amazon and Google all said they have cash flow issues due to there spending in AI. The money is flying out their doors, but not coming back in. Anthropic speeding up the timeline of there IPO also ties into this, where that event most likely will mark a short term top for the space in the near term. Companies want to IPO when the demand is highest.
Now we have known for the last few weeks that the market was weak and we've hung out in cash as a result. But we could not quite point our finger on the why. Now the why can easily be pointed at the weakening AI trade.
The market overall needs to shakeout the recent support area to run some stops before we will see a real climb to new highs and now the market is starting to get its why that will happen.
If the market shakes out to the 730 area, it would give the market a wider 50 point range and keep us in 5% pull back territory.
Sector wise, we continue to see sectors like Energy, Healthcare and Bio Techs hitting new 52 week highs, which are the sectors to focus on.
While most of the sectors that were in Stage 4 breakdowns for the last month or so, have started to form nice textbook Stage 1 bases. Sure semi's and tech will help the market pull back, but the rest that are basing will help limit how far the market can pull back.
As we get into the thick of earnings season, the market is going to continue to remind us why we avoid rolling the dice going into earnings without a big enough cushion. INTC and REGN give us a perfect example of this.
Both INTC and REGN beat there earnings estimates by over 20%, yet INTC lost 28% of its value overnight while REGN gained 13% (sorry Chad). Now Chad and I had this earnings talk on Thursday where selling made sense because the coin flip was not worth the risk. When you sell and the name gaps up it hurts. But missing those gap ups to keep yourself out of the 28% losses is a trade I would take any day.When you get trapped in a name like INTC after a gap down like that, that money becomes dead money. It will take INTC another 2-3 earnings report before they can rebuild the confidence to get back to the price levels it was at on Thursday. That is the best case, while it could take even longer, after this massive gap down, it could be like Nike, that has been in a 5 year breakdown stage.
As much as it sucks when the name you sold the day before gaps up, getting trapped in the gap downs are ankle weights that are far more costly. This is why you need to know when the names you are trading are reporting and if you are not up 10% or more in the name, selling is the universal answer.
By doing this we remove the "chance" part of trading, where "chance" or "luck" is something that gamblers look for or pray for. We want to be systematic and repeatable, which we have done a great job overall lately in this weak price action. Keep staying patient and we can start to hunt for the new earnings flag that are about to start forming.
From Bennett
Founder Big Picture Trading
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