AI Chips Decline 15% While Software Limits Losses: Joe Mazzola on Volatile Tech Moves

Sam (0:00)

Live, it's time now for the big picture. Let's welcome in Joe Mazzola, Head Trading Strategist over at Charles Schwab. Good morning, Joe. What a busy 48 hours we've had here. I'm just wondering, we're trying to come off the lows right now. It looks like tech isn't fairing as badly as it was at the open. Anything you're seeing on the screen that's for the reason behind that right now, or do you think this is just a digestion phase?

Joe Mazzola (0:21)

Hmm, I guess that'll be the question at the end of the day, you know, to really kind of gauge whether or not this pullback that we've seen in the semiconductor space, you know, it's basically down eight straight days, and it's approaching around a 14-15% pullback within that time, so, you know, it's had a little bit of teeth to it, Sam. You know, it'll be interesting, your prior guest, I thought, summed it up very nicely, in that whether or not you're talking about kind of what we've seen in the 10-year yield, how that kind of moved back down, I think a lot of it is based upon this idea of how much of this AI investment trade can hold up. I mean, just take a look at the TSM's Taiwan Semi Conductor numbers. I mean, they were brilliant, you know, 69% profit surge, 51% revenue rising quarter over quarter, year over year, excuse me.

And the stock was down 4%. So there's just a lot built into the AI trade and, you know, kind of off of the back of the core. We've knew these last couple of days, it's just really soured the whole market mood towards that space.

Sam (1:31)

Yeah, I mean, do you think it's justified that, you know, it seems like the market is, I guess, freaking out over not the fundamentals because the numbers look good, ASML, TSM, as you point out. But it's really about the cost of capital right now that seems to be unnerving this market. And we've seen kind of like the baby being thrown out the bathwater across the whole of the tech space. As a result of that, I mean, look, I was looking at DRAM ETF, I mean, most oversold since inception. I mean, you've broken through some key levels on Western Digital, on names like Micron. I mean, take a look at the South Korean Cosby last night.

You know, is this the start of something? Or do you think this is a healthy pullback given that we know that the demand is there?

Joe Mazzola (2:16)

Well, if you go back to the first pullback that we saw, remember, at one point, the semiconductor space was up 85% year-to-date heading into May and June. So, you know, that was a pullback, and then we haven't retaken those levels, and now it's a little bit of a pullback now. So I think that there's a repricing going on. And I don't believe that it's necessarily hitting the entire tech sector because you have seen software outperform as of late. So take a look at something like the IGV, where you were mentioning Microsoft coming out of the break. So you have seen pockets of strength, you have seen Mag-7 do fairly well in the last month relative to the S&P 500, relative to the equal weight. But there is rotation, yet there's absolutely more of a defensive tilt right now that you're seeing in the markets. We'll see whether or not this little bounce off the low, build some strength to it because I do think that there have been some levels that have kind of been crossed a little bit from a technical perspective that might make it difficult for the NASDAQ to kind of get back to where it was. Although, I think really what's going to come down to, Sam, is earnings and we haven't even really started the tech earnings outside of maybe Taiwan Semi or ASML as you mentioned. So there's a lot of tech earnings that can buoy some of this sentiment, hopefully.

Sam (3:30)

Yeah, you hope. It was interesting, actually, I was looking at a chart between the XLP, obviously consumer and XLK, that is tech this morning over the last month or so. We saw that divergence, obviously, as the MAG7 started to reestablish that leadership, we've now converged and started heading in the opposite direction. I mean, they've literally crossed over each other. So what do you make of that rotation that we've actually seen under the surface? I mean, you look at health care today, again, higher staples up once again. Obviously, we're seeing a bid for fixed income as well. So the money is going somewhere.