Weekly Stock Market Update & SPY Technical Analysis
An interesting divergence happened last week, one that could signal where capital is flowing in the first weeks of the fourth quarter. The semiconductor ETF $SMH pulled back more than 4%, while the software ETF $IGV pulled ahead by 3.9%. The move is likely still being driven by the massive jump we saw in Accenture last week, which sparked buying back in software / SaaS business…the same ones that investors left for dead at the start of the AI boom.
So, Why the Semiconductor Sell-off?
The clearest answer is capital rotation. Investors aren’t willing to pay the premiums for the AI buildout during an era of high interest rates. The billions of dollars that it already costs to build AI data centers is now costing more because the capital itself is becoming more expensive. This is not a theory, the long term bond fields are telling us that investors are demanding more returns on their capital right now. Note, some of this is also influenced by the influx of government spending and running inflation.
Another note, a data center company that was expected to IPO in Australia, Firmus Technologies, backed by Nvidia, canceled its roughly $5 billion IPO last week after struggling to attract enough investor interest at its proposed valuation. This was supposed to be one of Australia’s largest IPOs in history, but investors weren’t willing to pay the asking price. Why? The company was being valued at tens of billions of dollars despite having only a fraction of its planned data center capacity operational. The rest would require billions more in financing and years of construction before generating meaningful returns.
To us, it seems like investors have paid the “max” price on a lot of the AI buildout, now it’s time for these companies to show returns.
Where else is the Capital Going?
Software wasn’t the only gainer last week. Utilities and consumer defensive companies also moved higher, reinforcing investors’ willingness to continue buying, but shifting toward more predictable businesses. Over the next few weeks, especially during earnings season, we’ll watch which sectors and industries are posting the biggest growth, and which stocks investors quickly buy up following their earnings reports.
Speaking of which, ASML and TSMC are set to report earnings this week. These are some of the most important (TSMC is arguably the most important) names in the semiconductor industry. Strong numbers from these names can easily reignite the semiconductor rally.
This Week’s Economic Focus
Inflation will be the ultimate benchmark to watch this week. Oil prices are still elevated, and last week’s FOMC Minutes showed that Fed members are still considering further tightening if necessary. This week’s inflation data could ultimately decide whether or not another interest rate hike is on the table in the October FOMC meeting.
SPY Technical Analysis
SPY is still holding the breakout range that we highlighted last week, supported by rotation into companies that are starting their turnaround. Breaking above 780.00 may be a difficult to do while long term bond yields are above 5%, but the fact that we’re holding these highs despite all the pressure is a signal of how strong buyers are in this market. Our outlook remains cautiously bullish, but on names that are “forgotten.” We’ve highlighted some of these names in our watchlist.