Why markets got hit with some downside today…So, i

Why markets got hit with some downside today…

So, it’s important to note that the S&P $SPX was down a mere 0.13% to end the day and is up 2.2% over the past week.

Even the Nasdaq is up 1% over the past week.

It feels like we had some momentum unwind today which is why the most high-beta names, in this case the semis, were down 10-15%.

Why the unwind?

- July is usually good month for stocks but in the past 5 years, has been down 5% on average for momentum stocks. My logic is people take profits going into the summer after a strong Q1 but regardless, July is not good for momentum historically.

- The $Meta Platforms(META.US) news basically scared the street into thinking there are no more compute constraints and that the capex build is over.

- Nvidia launching a new product today to backstop neoclouds is once again leading to claims of circular financing.

To me, this drawdown feels normal to start July but also it is the 5th type of ugly day we’ve seen in the past few weeks where momentum just dumps hard. The bearish angle on that is the market wants to have a full correction and these dumps are a warning. The bullish angle is these dumps are very, very normal and part of a bull market. $Micron Tech(MU.US) having a monster earnings and taking a breather to consolidate isn’t the end of the memory trade but it is a short term stop to the massive euphoric sentiment around it. Same with the neoclouds, same with the photonics names, etc.

I think labor market news today is noise. The market might actually care but it really doesn’t. All they care about is capex because thats what stocks are priced on right now. Not fed hikes or cuts on a potentially weak labor report.

What matters deeply is if the demand side picture around compute has changed. If it has, the whole AI trade is over. If it hasn’t, then there is a long way to go on all levels of the stack but once again, the only alpha over the past few months has been taking advantage of these dips as the market has a mini deepseek every other week if they start to question the AI thesis.

Q2 earnings will be super important to continue justifying the earnings multiple expansion and capex guide but if the summer takes a breather on momentum, it feels like that’s probably the opportunity to continue gaining exposure to the broader AI thesis.

Without those opportunities, there would be a bubble since vertical moves always get punished and one could argue that we’ve gone so vertical that this type of a drawdown over the past few days is the healthy part of a bull market which creates the opportunities for it to continue.

Source: amit