🍔Chip Rotation Continues (+3 Stock Picks)

Do chips have further to fall? Our thoughts inside...

Welcome back to MktContext where we study the US economy and time the stock market.

Current stock market timer: BULLISH

Insurance stocks have broken out strongly since we recommended them in our Jun 28 letter. Many of these stocks are up 8% to 10% in just two weeks, beneficiaries of the ongoing rotation out of chip and tech stocks.

Insurance stocks

The market rotation continues with downside in chip stocks and a surprising rebound in Mag 7 stocks. The SK Hynix ADR issuance increases the supply of overhyped chip stocks in the marketplace.

This is a stock picker’s market. Being able to pick winning stocks carries outsized rewards because not all stocks are going up simultaneously.

Chip rotation

The chip rotation continues in full force. Chip stocks and AI infrastructure providers have declined precipitously and are now bouncing slightly. For example, Sandisk (a major memory chip maker) fell -37% from highs.

So where is all that speculative money flowing to instead? A variety of sectors, but most notably Biotech, Pharmaceuticals, Insurance, and Software. Even Bitcoin and Chinese stocks are getting a lift as investors seek out diversification in risky or uncorrelated asset classes.

Biotech daily chart

Insurance stocks daily chart

We were able to capture some of these breakouts in our weekly stock picks.

The question everyone wants to know is: Do chips have further to fall? Possibly. As the daily chart below shows, SOXX bounced off the 50-day moving average. It is currently in a dead-cat bounce, driven by excitement for the SK Hynix ADR issuance.

Semiconductors daily chart

Technically, due to the nature of leverage and investor psychology, it’s highly unlikely SOXX retests the all-time high anytime soon. Fundamentally, investors are wary of companies increasing AI infrastructure spending, which dampens the demand for chips.

Last week we talked about the possibility of SOXX dropping to the 100-day or 200-day moving average after a historic over-extension. It’s also possible that it consolidates sideways for a period of time. Either way, we won’t be buying SOXX until we see some better digestion.

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