Hello TheoTrader,
Back in May, I called the Great Tech Reset. It became the trade of the year.
Tech ripped higher from the April lows. AI names went parabolic. Semiconductors doubled.
We made a killing:
- IONQ up 74% in 26 days
- AMD up 389% in five days
- QBTS up 82% in 24 days.
The profits stacked up fast. But underneath the surface, the Trinity Terminal uncovered a notable shift…
This screenshot from Oct. 7th shows healthcare stocks scoring exceptionally high, far better than tech.
While this can change day to day, I started noticing a trend. Slowly, healthcare stocks were replacing tech with the highest scores.
Fast forward a month and those high-flying AI companies and similar stocks they carried have hit the skids.
The very leaders that took the market to new heights are sending it lower…fast.
But it’s more than just the obvious.
The Trinity Terminal is telling us something important.
Healthcare is the second-largest sector in the market. The valuations finally make sense after months of underperformance. Money has been flowing there steadily.
But….healthcare carries a defensive quality. Investors rotate into defensive sectors when they smell trouble.
So, how do we know whether this is a simple rotation or the start of something bigger?
Let me tell you what I think…
Chips Lead Everything
People say tech leads and the market follows. That's not quite right.
Chips lead. Tech follows.
The market trails behind both. The AI revolution started with semiconductors. Everything else came after.
Look at this weekly chart of the Philadelphia Semiconductor Index. The move from April's lows tells the whole story.
Prices doubled in six months. From around 297 to 693. A clean +100% at the index level.
Individual chip names did even better. The breakout from the wedge pattern in June confirmed the move was real.
The Bollinger Bands volatility measure expanded to levels we haven't seen since 2021. The RSI spiked into overbought territory repeatedly.
But, recent candles show something different.
The momentum is fading. The RSI rolled over. Volume patterns shifted. That relentless bid that propped up every dip has disappeared.
Markets that double in six months don't just keep doubling. They get overheated.
I'm not going to bore you with bubble talk. I'm tired of hearing about bubbles.
They matter when they pop.
Right now, this market just needs rest.
So, what does that look like?
Time or Price
Markets correct in two ways. Through time or through price.
Time corrections mean sideways chop. Prices move in a range while fundamentals catch up to valuations. Momentum cools off. Sentiment resets. It's boring but healthy.
Price corrections mean sharp selloffs. Fast pain that ends quickly.
Semiconductors will probably take the time route. A few months of sideways action makes sense here. The AI story isn't over. The valuations just got ahead of themselves. Let the story catch up to the price.
This consolidation period serves a purpose. It shakes out the weak hands who chased the rally too late.
It allows companies to deliver earnings that justify their valuations. It resets the technical indicators that flashed overbought for months. Most importantly, it builds the foundation for the next leg higher.
The pattern repeats throughout market history.
Leaders consolidate. Momentum shifts elsewhere temporarily. Then those leaders return stronger when conditions align. We saw it in 2016 with the FANG stocks. We saw it in 2020 with pandemic winners. The playbook doesn't change.
That sets up the real opportunity.
2026 should bring compelling entry points in chips.
New bases will form during this sideways chop. Support levels will establish themselves. The rotation into healthcare and other sectors will run its course. Eventually, capital will flow back to where the growth actually lives.
Tech will lead again when the setup aligns. The difference between now and then comes down to patience. The traders who wait for proper consolidation will capture the next major move. The ones who chase now will likely get chopped up in the range.
Watch for these signals as we move through the next few months. Tightening price ranges on the semiconductor index. RSI settling back into neutral territory. Volume drying up as the sellers exhaust themselves. When those pieces fall into place, we'll be ready.
I'll keep you posted on when that time comes.
Gianni Di Poce
THEOTrade