Big Rebound for the Chip Stocks...Not so much for the Mag 7 Names
The Mag 7 group is now in correction territory...and the broad market can't rally a lot more without it.
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The earnings report out of Micron is helping the stock market rebound in a big way this morning. However, the Mag 7 names are actually lower this morning…after already falling into correction territory. If they continue to decline, it’s going to be very tough for the major averages to rally much further……Yes, the news out of Micron is very positive, but it might not be sending up the kind of “all clear” signal that some are assuming this morning.
A decent sized reversal which began late in the morning yesterday caused the stock market to see its third decline in a row…and its 5th decline in six trading days. However, we’re seeing a very strong bounce this morning…as Micron (MU) reported very strong earnings after the close last night. Their sales forecasts were particularly strong…and they announced that they have secured the kind of long-term customer agreements that will help them navigate any downturn over the next few years.
That news also has MU trading higher by 17% as we write this morning…which means that it will erase all of the losses from yesterday’s big decline in the stock (and even push it slightly above its highs from Tuesday’s close). This news is also helping the index futures bounce from their three-day decline…and although they only retraced about 1/3 of their recent losses, it’s still a positive development for the stock market. In other words, unless we get some sort of delayed “sell the news” reaction in the tech sector over the next two days, this news should bode well for the market holding up through the end of Q2 (on Tuesday).
The news from MU will also help the SOX semiconductor index retrace more than half of its recent decline. Therefore, if this KEY leadership group can continue to push higher, it should be positive for the overall equity market as well…especially if it can rally to another new all-time high as we move into the third quarter.
It is worth noting, however, that the MAGS Mag 7 ETF is actually pointing to a slightly lower opening today. The drop will only be about 0.3%...based on where it’s trading in the pre-market as we write…but given that the S&P futures are trading higher by 0.6%...and the NDX futures are trading higher by more than 2%...this action in the Mag 7 group is quite disappointing.
On the one hand, this could merely be indicating that the tech sector is continuing to see some “rotation” WITHIN the different groups of that sector. However, the fact that the IGV software ETF is also trading lower (by about 0.75%), shows that more than one group is not going along with this morning’s rebound. As we highlighted last weekend, it was fine when ONE group (the software group) was falling while the rest of the rest of the sector was advancing earlier this year (especially given the reasons WHY the software group was falling). However, when you see another group within the sector seeing some meaningful weakness, it should raise some questions in investors’ minds.
Let’s face it, the MAG 7 stocks now account for more than 35% of the S&P 500…and almost 50% of the NDX Nasdaq 100. Therefore, if they decline as a group in any meaningful way, it’s definitely going to weigh on the major averages. The MAGS ETF is already in correction territory…down more than 11%...and it’s something that could/should create some problems for the broad market…if (repeat, IF) it continues as we move into Q3.
Don’t get us wrong, the news out of MU this morning is very bullish. It’s just that a few cracks have developed in the tech sector recently…on both the fundamental side…and the technical side of things. Therefore, we believe it will be extremely important to watch how these hyperscalers trade going forward…because if they continue to decline, it’s going to make it VERY tough for the rest of the market to advance.
These names are just too highly weighted in the SPX & NDX for them to avoid having a big impact. And if the major indices fall in any meaningful way, the individual investor (who has become so important in today’s market) will start to “rotate” towards cash…not other groups…especially given how many times they’ve heard the term “bubble” over the past year.
