Several major Big Tech companies are reporting this week. I believe that as long as they continue discussing “cost-cutting” initiatives and keep margins elevated, any big dips are likely to be bought. The strongest sector in the market is currently Semiconductors, viewed through the lens of the iShares PHLX SOX Semiconductor ETF (SOXX), writes Larry Cheung, founder of Letters from Larry.
Big Tech has laid off about 24,000 employees in 2024 alone, and should this trend continue, we are likely to see these companies stay well-bid. While these stocks are overheated from a technical standpoint and rather risky for traders looking for new positions, there is actually no reason to touch them on a longer-term basis as their fundamental outlooks are strong.
It is a rather somber observation that increased layoffs are correlated with rising stock prices in the tech sector. But I believe this correlation to be quite reliable at the FAANG companies given that investors are always looking to squeeze more free cash flow, EBITDA margin growth, and EPS out of the firms. The way I see it, the more the AI theme rallies, the louder the signal that a greater number of employees may be displaced as firms replace traditional workers with AI.
Given that companies are in the process of trying to figure out how to “do more with less,” the long-term secular tailwind for semiconductors and their ability to answer this question is clear. So, I see the AI rally as a catch-22. It’s good for shareholders. But not so much for the workers who work at these companies.
Ahead of Big Tech’s results, the market doesn’t yet show any evidence of breaking down. For the S&P 500, dips are shallow, and only last about 30-45 minutes during the day. Short-sellers who hold shorts overnight in this environment are going against this environment’s backdrop. While the Invesco QQQ Trust (QQQ) has been softer on a relative basis, the most sellers have been able to do is convert a bullish structure into a range-bound structure since mid-last week.
As for the SOXX, a retracement for this ETF is healthy. Entering a new equilibrium between 565-580 serves as a resting spot for the next leg higher (if that’s what the market wishes to do). Only violation of 565 and lower sustainably on the ETF in a convincing manner will mean the near-term backdrop has deteriorated.
Recommended Action: Buy SOXX.
