Tech Stocks Surge as Momentum Traps the Bears

Tuesday, Wall Street investors sent the market soaring as they looked past geopolitical concerns and jockeyed for positioning in tech stocks ahead of earnings season. The Nasdaq, which has been the most beaten-down index, stormed back nearly 2%.

Time to Buy the Dip in Momentum Stocks?

High beta, tech momentum just suffered a 33% drawdown in a handful of sessions, marking one of the worst drawdowns since the late 1990s Dot Com bubble burst. However, previous drawdowns of this magnitude have resulted in significant market bottoms. For instance, in 2022, high-beta momentum stocks suffered a 32.82% drawdown before bouncing.

Image Source: GS

Stocks Climb the Wall of Worry

According to the CNN Fear & Greed Index, Wall Street investors are currently fearful. The fear comes as the major market indices have chopped sideways over the past few weeks. Despite the flattish price action, the destruction of momentum stocks and the restarting of the U.S.-Iran conflict have caused elevated fear levels

Image Source: CNN

However, just as many investors threw in the towel on AI stocks, recently beaten-down AI stocks such as SanDisk (SNDK), Cerebras Systems (CBRS), Cipher Mining (CIFR) stormed back.

From False Moves Come Fast Moves

On Wall Street, one day does not prove a trend. Nevertheless, it can produce valuable clues for investors. For instance, Micron (MU), a leading AI stock, broke down from a bearish head-and-shoulders pattern on the daily chart. However, on Tuesday, shares roared back more than 10% and retook the “neckline” of the pattern. More often than not, false moves produce violent moves in the opposite direction as late bears and shorts get trapped.

Image Source: TradingView

Meanwhile, MU shares retook the 10-week moving average after a brief shake below it. The regain of the 10-week moving average means that shares remain in an uptrend. Furthermore, MU is forming a classic bull flag pattern. Similar patterns have produced triple-digit returns over the past few years.

Image Source: TradingView

Bottom Line

Tuesday, stocks climbed the proverbial Wall of Worry as investors looked beyond geopolitical concerns. The false moves in many AI stocks suggest that the rally has staying power.

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This article originally published on Zacks Investment Research (zacks.com).

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