Investors Struggle as AI Wrecking Ball Reshapes the Market
Here's how to navigate this confusing market and my short-term trading game plan.
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Market participants return to work this Tuesday morning in a skeptical mood. Most notably, the Magnificent Seven stocks remain under pressure as the debate over return on investment intensifies. The semiconductors are under pressure and software leaders like Palantir (PLTR) are still struggling.
The AI Paradox
The irony of the action in AI-related stocks is that, on the one hand, several industries are under extreme pressure due to concerns about AI competition. For example, in the financial sector, large brokerages such as Charles Schwab (SCHW) were hit hard due to concerns that AI is developing financial management tools that will replace some of their services.
AI is looking like a wrecking ball across an increasing number of industries, but there is also concern about the high level of capital spending and the potential return on investment. AI is obviously a huge technological leap, but the market is concerned about the heavy investment required.
There is something illogical about the great economic disruption caused by AI, while also being concerned that there is too much investment in AI. It is a confusing situation, and investors are struggling to figure it out.
Macro Instability
Unfortunately, the chaos in the AI sector is spilling over into the broader market, creating instability. The recent jobs and inflation data reports were positive, but the Fed doesn’t appear to be in a rush to give the market the rate cut it wants so badly.
On the other hand, bonds (TLT) are very strong, and interest rates are falling. Precious metals are rolling over, and the dollar is seeing some strength. There is still plenty of worry about the economy, but it doesn’t seem to be influencing the Fed very much.
Navigating the Landmines
Earnings season is winding down, but there are still plenty of reports rolling in from smaller-cap names over the next couple of weeks. This will create some volatility in individual names, as small stocks are notorious landmines and can create some ugly surprises if you are not prepared.
Overall, the market is not nearly as healthy as the indexes suggest. There has been brutal corrective action in software, chips, and many AI-related names. This is particularly notable because these groups were the key leadership for so long. It will take some time to sort things out.
My Game Plan
I remain focused on managing individual positions and looking for some dip-buying opportunities. The biggest challenge is that there isn’t much bounce, even as stocks approach support levels. There may be good values out there, but there is no rush to buy them.
Don’t forget that Chinese markets are closed this week for a holiday, which will likely impact liquidity.
At the time of publication, Rev Shark had no positions in any securities mentioned.
