Investors Brace for Pivotal Economic Data as AI Chaos Shifts the Landscape
Here's my focus as earnings season begins to wind down and rotational action clouds the technical picture.
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The major indexes are indicated mildly higher on Tuesday morning as investors await several important economic reports. Retail sales numbers will be released today, followed by January employment news — which was rescheduled to Wednesday, February 11, due to the brief government funding lapse — and CPI data coming later this week.
The technical setup for this news flow is mixed and adds some complexity to the situation. On one hand, the DJIA is at a new all-time high and the S&P 500 is hovering just under a breakout point, but the Nasdaq 100 (QQQ) and Magnificent Seven (MAGS) are well under their 50-day simple moving averages. Meanwhile, the Russell 2000 is not far from highs after a big bounce over the last two sessions.
Chaos in the AI Sector
The chaotic technical pattern is the result of some deep corrective action and volatility in the AI sector that spilled over to high P/E growth names, including software, semiconductors, and momentum favorites. Large-cap tech has faced heavy pressure lately as massive capital expenditure plans from the likes of Amazon (AMZN) and Alphabet (GOOGL) have investors questioning near-term monetization, even as underlying earnings remain solid.
The question now is whether the economic news is going to trigger further rotational action of some sort or will it boost or hit the entire market.
Growth Versus Stress
The key economic issue right now is somewhat similar to overall market conditions. On one hand, there is very strong growth, which is like the DJIA. It is a nice headline number, but it covers up the bumpiness under the surface.
On the other hand, recent employment news is showing signs of stress, much like the AI sector and the Nasdaq 100. Small-caps remain highly correlated with interest rates and have bounced with bonds over the last couple of days as the 10-year yield stabilized near 4.18%.
Earnings Wind Down
Earnings season is starting to wind down and there is a shift to reports from smaller stocks. About 60% of S&P 500 stocks have reported and around 79% have beat expectations. Many of the biggest names have reported and there aren’t many left that will have broad market impact, though Nvidia (NVDA) remains the big outlier later this month.
That is the setup as we await news flow. Bears are still grumbling about valuation and speculative excess, while Bitcoin (IBIT) continues its struggles, trading below $70,000. However, there are signs of speculative stock picking and many investors are focused on stocks with good charts and valuation. It looks like the AI chaos has cooled off and now there is some careful buying of those names that appear to be in the best position going forward.
Game Plan
I remain focused on managing individual positions and making selective buys. I added to TeraWulf (WULF) on Monday as it shows resilience amid the broader volatility in the crypto-adjacent space.
At the time of publication, Rev Shark was long WULF.
