The dip buyers are back in town and seeing how yesterday played out, they’ve apparently decided that last week’s tech selloff was a rather generous early Christmas sale. The Nasdaq closed up by 2.7% to start the new week, while the Philadelphia Semiconductor Index (SOX) surged by nearly 6.9%. That’s quite the comeback after a rather brutal showing by tech stocks in the week before.
But before we get too carried away with the latest rebound, it is worth asking whether this is the start of another meaningful rally or just the market picking itself up after falling flat on its face? The chart below offers some perspective.
Despite Monday’s impressive recovery, the Nasdaq is still slightly below where it finished October trading. Meanwhile, semiconductor stocks remain roughly 6% below their levels at the end of last month – having suffered a rather punishing 12% decline just last week.
Overall, what we’re seeing is not all too surprising. After all, the sharper the fall, the more spectacular the rebound can look.
That being said, there is at least something encouraging beneath the surface.
AMD surged higher by 13.3% and Broadcom climbed by 8.8% in trading yesterday, while 29 out of 30 semiconductor index constituents finished higher.
The lone exception? Well, taht was Nvidia. The poster boy of the AI trade fell by over 4% yesterday but that was largely tied to the controversy surrounding CEO Jensen Huang rather than a straightforward reflection of broader AI demand.
As such, I’m not going to lump Nvidia’s decline together with the wider semiconductor story. If anything, the sector’s ability to rally strongly despite weakness in its biggest name is an encouraging sign that buying interest extends beyond just one company.
So, what’s the catch here?
Strong breadth tells us that buyers are returning to the market. However, it doesn’t necessarily tell us that they’ll be sticking around.
For the Nasdaq, it will be important to watch to see if dip buyers can hold above the 200-day moving average after reclaiming the key technical level yesterday. For semiconductor stocks, the challenge is arguably even greater. The SOX remains below its own 200-day moving average and so that leaves plenty of ground to make up despite Monday’s surge.
If both can start overcoming these technical hurdles while broader market participation holds up, then we might have a stronger case that this recovery has legs beyond Monday’s bargain hunting.
The US CPI report today provides the next meaningful test, particularly if hotter inflation reinforces expectations of a December Fed rate hike. And Fed governor Waller has just raised the stakes after suggesting that a core monthly inflation reading of 0.3% or higher could warrant considering a larger 50 bps rate hike in December.
For now, the comeback looks convincing enough for one day. However, getting buyers back through the door is arguably the easy part. Keeping them around though? That’s where the real test begins.
This article was written by Justin Low at investinglive.com.