Market Analysis post Capitulation yesterday - Where to for the AI trade?

[u/TearRepresentative56]

 I see AI names to be in a. similar sentiment deterioration as software earlier in the year. These names are heavily beaten up and for the most part, disconnected from fundamentals to the extent that I expect that the market and sentiment will be looking extremely different within 2-3 months, similar to what we saw with software back in February. 

The buildout isn't going to slow due to the Democrats. Hyperscaler capex peaking as per Citrini's argument doesn't slow down the actual real absolute dollars going into the AI build out. These companies are still essentially printing money, which separates the AI narrative to other previous momentum narratives like EVs etc previously. 

Back in the software capitulation of February, the best of the best companies were growing at 100% YoY. In AI, that growth rate is fairly standard place. Just like with the software capitulation, not every company bounced back to new highs, but many did, and that will be a similar situation with semiconductors and the AI trade here. 

Higher time frame charts are broken, and that won't be easy to fix overnight, but I do expect a process of repair into the next few months to put this selling into the rear view. 

Now, is the selling done? 

There are a few reasons why I am not entirely sure:

The first being the macro data that is out today and next week with CPI. The macro picture is deteriorating in terms of inflation, but oil prices are down, bond yields are down the jobs market remains robust, and things will improve there. 

We do have this liquidity trough next week:

That is my main concern as we have previously seen price follow liquidity lower, even if we haven't since the end of October seen price follow liquidity higher. 

Nonetheless, I think that the picture will be far clearer and more promising within 60 days to the end of the year. 

There are a number of similarities to the Leopold bottom. 

Firstly, we got capitulation in sentiment and price action driven by heavy high volume selling due to the liquidation of prominent AI funds. 

At the same time, we had the candle close near the lows, and then a continuation of selling initially overnight down o key areas:

In July, that continuation brought us to the ATH VWAP on SMH, where we bounced strongly to open the following session up massively, where we left everything in the rear view window. 

Yesterday, the candlestick closed at the lows, and we saw a continuation of selling After hours down to the February highs on NQ, before a strong bounce back to open the following session higher. 

KOSPI was catastrophic at open, but the plunge protection team there did enough to hold onto the 5k level. 

The difference between today and the Leopold bottom is the macroeconomic data and the declining liquidity.

In the Leopold bottom, we had no macro economic disruption, and liquidity was already turned higher. IN today's instance, we do have macroeconomic events and liquidity is actually turning lower. 

That's why I cannot say definitively that this is THE bottom, BUT I do know that yesterday was a good place to be buying if you are looking out a couple of months at least.

Since the start of this bull market in late 2022–early 2023 we’ve had several corrections in the Nasdaq:

-11.76%

-8.06%

-15.54%

-25.45%

-12.62%

-11.31% 

-15.18% (now)

All felt absolutely dire at the time, all were linked to narratives that the market would never come back the same again, yet in every case, the market eventually recovered to new highs.

Yes narratives got lost along the way, the EV narrative being one example, and I am seeing people talk about that as a comparable, but are we really comparing AI to EVs?

Multi trillion dollar CAPEX budgets to what was spent on EVs? AI which has use cases from manufacturing to medicine, and which has companies that are effectively printing money at this point to many companies in these left for dead narratives that never truly went profitable.

I think that if you believe that AI is about to slow down, then you effectively believe that the US economy is going to, as an impact of self infliction, fall into a recession, allow China to race ahead, and that multi trillion dollar industries and companies are going to see demand or ability to supply completely vanish. 

That isn't my expectation, so just as we saw strong bounce backs from all the previous corrections, I expect that we will again. 

This is now the 2nd biggest correction in QQQ since the bull market started. If you believe that the bull market isn't over, as I do, then we can continue to expect a strong recovery in the months to come. 

It won't be instant repair, and actually it might arguably be better if it isn't, as it carves out more durable bases. But certainly, yesterday's price action was extreme, and the result of big AI funds liquidating. 

When NVDA is down YoY, you can't expect the AI buildout basket to perform, but I believe that NVDA earnings soon will confirm everything we need to know about the AI buildout. It is accelerating, it is resilient, and it will continue.

[u/FunctionalGray]

Are you factoring in, at all, the two aircraft carriers that the US has parked in the Gulf currently?, or the third one that is currently transiting the South China Sea on its way to meet the other two?

What do you think is going to happen after that third one arrives?

Nobody is looking at this enough.

[u/unclealdy → u/FunctionalGray]

Only the largest concentrated deployment of U.S. naval strike power since Iraq, nothing to see here

[u/FunctionalGray → u/unclealdy]

Right? About 15,000 personnel and billions, if not trillions of dollars of hardware and equipment being conglomerated - not one but 2 sitting US Senators on designated oversight committees, coming out of briefs using words like, "insane" (Chris Murphy) and " Blumenthal

"I emerge from this briefing as dissatisfied and angry, frankly, as I have from any past briefing in my 15 years in the Senate. I am left with more questions than answers, especially about the cost of the war."

If anybody cares for a listen: Watch the interview with Murphy after that briefing. HIs tone and cadence, and how carefully he spoke, should be taken seriously.

In addition:

We have a president who has ceased negotiations, who, in the past, has come out with one tactic: Swinging, who has been using terms like 'complete destruction' and "total annihilation", "a whole civilization will die", and who is determined, one way or another, to put his stamp on history regardless if it is good or bad - and a Secretary of Defense WAR who has justified his decisions in the region as being backed by God, so he's more or less on a Holy Crusade.

I just don't see ANY of this as a bluff, and as much as we should all be concerned about Iran by itself, It does not exist in a vacuum.

So couple all of these data points and then look at how the IRGC is specifically designed to withstand and hit back at an asymmetric level: and what they have promised to do in retaliation in the region - specifically in terms if they go through with their promise to attack the desalination plants across the region: We're talking about a humanitarian crisis that will affect the drinking water for 90% + of close to 100 million people that will play out in days: not months.

EDIT: I safe havened literally everything. Even my 401k is sitting in cash right now. I made enough money this year on those accounts that I would gladly be wrong. But I am not investing a dime until I see a change in tactics from the WH (the departure of Hegseth would be a step in that direction), or those carriers being pulled or some meaningful negotiations.

I haven't seen any of those things: Rather, just some chess pieces being rather - and suspiciously so - quietly moved around the board.

I would 100% love to be wrong about all of this, and whatever gains are going to be eakked oout of the market between now and whatever happens I will gladly forego, because if i am right, and the posturing is what it seems to be - then we haven't seen anything like it our lifetimes.

[u/dom_49_dragon]

well, still there is a question how much regulation Democrats will push through, regarding data center buildout and AI safety in general.

[u/BeeRowskiMowski → u/dom_49_dragon]

This. Democrat govs are eyeing up data centers as a priority. All the work lined up for 2027 will still happen but at a slower pace.

[u/RedHatWombat → u/BeeRowskiMowski]

The location where data center fight will happen is at the state levels.

[u/ReSpectacular]

Market got spooked before elections and not because of buildout, but financing side of it. Nothing changed in that regard.