Bulls and Bears Face Off With the Market at a Critical Juncture
The question remains whether we saw just another short-term dip or is it different this time.
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The market is at a critical juncture on Thursday morning as bulls look to extend the bounce from Wednesday. At the same time, bears seek to sustain the profit-taking triggered on Tuesday by Palantir Technologies' (PLTR) selloff on a solid earnings report.
Wednesday's bounce was aided by speculation that the Supreme Court may rule against Trump’s ability to issue tariffs. That boosts retailers, autos, and other sectors that are paying increased prices for overseas supplies, but there is still extreme uncertainty about all the ramifications of a potential court ruling.
The key question currently is whether investors will quickly shrug off a day of ugly action, as they have a number of times since a sharp drop on October 10. There have been a half-dozen poor days of action since then, but there has not been any downside follow-through. The market has bounced back immediately, squeezing the bears and creating FOMO.
Is it different this time? This time, the market is more serious about questioning the valuation of big-cap technology names and the AI sector. There is a growing debate about whether the huge investment in AI infrastructure will produce the anticipated level of profits. Palantir was sold off not because it failed to meet expectations, but because there is a question about its valuation. It is anticipated to grow earnings by 37% in 2026, but it has a trailing P/E of about 300. Maintaining that valuation level will require surpassing expectations by a very significant margin.
Several short-term issues may prevent or accelerate deeper corrective action. Airlines are set to cut flights on Friday due to the ongoing government shutdown, but there is hope that a deal will be reached soon. The shutdown is affecting GDP, and a deal will likely spark a relief rally.
Another issue that could go either way is the likelihood of a quarter-point interest rate cut in December. Not long ago, it was a sure thing, but after the last Fed meeting and some not-so-dovish comments from Jerome Powell, it is now a coin flip. Fed speakers are lined up, but there is still no precise economic data due to the government shutdown. If the odds of a rate cut improve, that will provide market support.
The current trading environment is very difficult, with many leading stocks experiencing high volatility. The AI sector is no longer a safe haven for cash, and no new leadership is emerging right now.
I am proceeding with caution as I look for some news buys.
At the time of publication, Rev Shark had no positions in any securities mentioned.
