Pre Market Thoughts - 2 Jul 26

The last trading day of the week as the US market goes on a holiday tomorrow.
Overnight in Asia trading, we have KOSPI down about 7% thus far from yesterday's close - tracking the drop in EWY pretty well. Meanwhile NKY is down 2.3%. This drop in performance is strongly correlated with the devastation wrought on memory yesterday. $SKYHYNIX is down 11%, ahead of the 10 Jul listing, we could see bids coming into this. Meanwhile $285A has also been hit extremely hard, down 13% for the day, with strong support at ~65k JPY levels.
Overnight, the banks research departments have also dissected the META news. Wells Fargo thinks that "META's decision to sell excess AI compute comes in addition to its model efforts, not replacing them. This likely reflects META opportunistically selling latent compute at high ROIs as compute value climbs. Despite this shift, we dont expect a pullback in META's capex or that overall compute needs are lower."
On Neoclouds - "While we acknowledge these vendors add competitive pressure, we think they more importantly 1)validate the massive AI infra opp and 2)could represent potential strategic acquirers of these models in LT"
So, if fundamentals look sound, why is the market selling off so hard then?
Unfortunately, the answer again points to flows. At this points, flows are dominating the short term price action for semis as we navigate thin books and massive intraday flows.
July while being fantastic seasonally for equities also has historically been a negative month for momentum - (broadening out of the rally) - GS high beta momentum basket as a measure, dropped over 10% yesterday. This reflects the big factor sell off. What does the momentum basket include? All the tickers that have been doing well - ($MU, $SNDK, $INTC, $AMD etc)
Yesterday was NOT a semis sell off - $NVDA was unscathed. Yesterday was a liquidation of the momentum factors. How long can this last? If history is a guide, perhaps a few days (given the severity of the move yesterday). However, markets dont exist in a vacuum, once a stock is sold down hard enough, "value" buyers would start bidding. This can create price action that would look extreme - straight line down, straight line up.
One helpful point to note is that seasonally, July's negative performance for momentum has historically come from its short legs outperforming, not from its long legs going down. This would mean hyperscalers, NVDA rallying. In the bigger picture, this is helpful in continuing the semis cycle, given the increased ability of the hyperscalers to finance out the capex build.
Good luck!