Oracle Disappointment Causes Surprising Dip in AI Sector

Selling pressure picked up on Tuesday following news that Oracle’s  (ORCL)  profit margin in its cloud computing business was lower than expected. Several analysts defended the stock later in the day, calling the dip a "buying opportunity." Still, it provided a good excuse for some much-needed profit-taking in a market that had become extended and overly exuberant.

Breadth was poor, with only about 30% of stocks advancing, but there were 230 new highs before things started to crumble. The losses in the indices were mild, with the most significant drop occurring in the Russell 2000 (IWM) , which declined by about 1%. The Magnificent Seven was only down 1.1%.

The worst performers were semiconductor stocks (SMH)  and data center companies. In addition, Bitcoin-related names also took a hit and Tesla (TSLA)  experienced a sell-the-news response following the announcement of new, cheaper models.

While losses are never a positive, the market badly needed some corrective action as we head into third-quarter earnings. Sentiment has become quite frothy, and a variety of metrics indicate that upside for the indices is quite limited when conditions become this extreme.

The good news is that there are still many stocks that are not wildly extended or expensive. Some of the AI plays have become very frothy, and they tend to carry the indices, but there are still plenty of good opportunities for astute stock pickers.

The key question to consider is the likelihood of taking deep and broad corrective action at this point. Anything is possible, but two significant market positives are a friendly Federal Reserve that is on track to cut rates several times, which will boost liquidity, and positive seasonality heading into the end of the year. I’ll have more on this on Wednesday.

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre had no positions in any securities mentioned.