Momentum Monday - Sector Rotation Is Healthy, Earnings Season Is Upon Us and The Leading Web 2.0 Companies Are In Great Shape

Bull markets correct through sector rotations. This is exactly what we have been seeing lately. While recent leaders have been pulling back to their 20 and 50-day moving averages, capital has been rotating into defensive sectors like healthcare, consumer staples, and utilities. I don’t know how long this rotation will last. It makes sense that many market participants are reducing risk ahead of the FOMC meeting on Wednesday and the earnings reports in the next few weeks.

The latest earnings season is just getting started. So far, we had financials crushing estimates and rising for the most part. The three momentum stocks that reported earnings pulled back – Tesla, Netflix, and Intuitive Surgical. All of them beat the always conveniently-low earnings estimates. All of them had a significant rally ahead of their earnings which typically means that any good news was already priced in. This is one of the reasons we saw all three selling off. They are all in an uptrend on a daily and weekly time frame. It is normal to see them test their 50-day moving average after they broke below their 10 and 20-day moving averages.

The semiconductor sector also had two strategically important companies report. ASML, which is the biggest producer of machines that make chips, and Taiwan Semiconductor, which is the biggest producer of the actual chips in the world. Both sold off slightly after their reports. TSM guided next year’s revenue down citing the cyclicality of their business. Their fastest-growing component is AI-related chips. They currently account for only 6% of their total revenue but are expected to grow at a 50% compound annual growth rate in the next 5 years and increase to low teens percent of revenue. So yes, demand for Ai chips is hot and it is expected to remain so in the next few years. I don’t know how much of that is already priced in but it also explains why every dip in NVDA and MSFT is getting bought and why every major company is working on A.I.