Dow Jones: Rotation Drives US Stocks Higher as AI Trade Unravels

Dow Jumps 600 Points on Oil Break and Rotation

The Dow is rallying Tuesday but the Nasdaq is not following because the money is going in different directions. Financials and health care are hitting record highs. Sherwin-Williams and Coca-Cola are carrying the industrial average after strong earnings.

Semiconductor sellers are still pressing the chip group for a fourth straight session. Sandisk gave back more than half its rally in a month and the memory trade is pulling the Nasdaq lower with it.

The Dow Jones Industrial Average is up 659 points or +1.3% at the mid-session. The S&P 500 is up 0.3%. The Nasdaq Composite is little changed after recovering from earlier weakness.

Daily Dow Jones Industrial Average Technical Analysis

The Dow Jones Industrial Average is trading higher late in the session on Tuesday. The market is currently in a position to challenge the July 16 main top at 52924.86. This would put the all-time high at 53289.30 on the radar.

The blue chip average is also trading on the strong side of a short-term retracement zone at 52621.85 to 52415.95. This area is new support. It’s also controlling the near-term direction of the Dow. Holding above it suggests buyers are in control. A break under it opens a near-term test of the 50-day moving average at 51549.71. It is providing both support and trend guidance.

Chip Sellers Are Still in Control

The VanEck Semiconductor ETF fell more than 3%, extending the decline into a fourth session. Micron dropped about 8% and AMD lost 7%. The selling is concentrated in the AI supply chain where traders are questioning how much future spending is already priced into chip valuations.

Software is bouncing with the iShares Expanded Tech-Software ETF up nearly 2%, Microsoft gaining almost 2% and Salesforce rising 5%. Software buyers are willing to step into beaten-down names with recurring revenue and lower capital needs. Chip sellers are still reducing exposure to the names tied to hyperscaler spending. That split is the reason the Nasdaq cannot join the Dow’s rally. The growth trade does not recover until the chip group stops making new lows.

Earnings and Lower Oil Are Rewarding the Right Stocks

Sherwin-Williams and Coca-Cola are doing the heavy lifting for the Dow after both companies beat second-quarter estimates and Coca-Cola raised its full-year outlook. The Health Care and Financial Select Sector SPDR ETFs both hit fresh intraday all-time highs. Insurance stocks are helping financials. Health care is catching a bid from traders looking for earnings and defensive growth outside the AI trade.

This rotation has been building for six to eight weeks and lower oil is giving it room to run Tuesday. The sectors catching the bid are the ones that do not need the AI spending debate settled and do not get hurt when crude stays contained. A renewed move toward $100 oil changes that fast. It puts inflation back in front of the Fed and takes the easy money out of the trade.

Memory Trade Breaks Down With the Chip Group

 

Sandisk lost more than 14% Tuesday and has now given back more than half the rally that made it the best performer in the S&P 500 this year. The stock went from $2,335 in late June to near $1,090 in a month. The memory names are getting hit the hardest because they ran the furthest on the AI demand story and the market is done paying for demand that has not shown up in the numbers yet.

What to Watch

The Dow has the bid because earnings, lower oil and the rotation are all running in the same direction. The Nasdaq is stuck because the chip selling has not stopped and Tuesday’s consumer confidence miss did not change the Fed picture heading into Wednesday. Warsh’s tone on inflation and energy costs determines whether the rate pressure stays quiet or comes back and lower oil only helps that case if the Iran pause holds.

The Nasdaq needs the megacap reports to give chip buyers a reason to come back. Until then the money keeps flowing into the sectors that do not need the AI debate resolved to keep making new highs.

The Dow is challenging its July top with the all-time high sitting just above. The retracement zone underneath is the level that has to hold for the rally to stay intact. A break under it and the 50-day average becomes the next test. Tuesday’s session gave the Dow the strongest close of the three major indexes and the megacap reports later this week determine whether the Nasdaq can close the gap or whether the rotation keeps widening it.

More Information in our Economic Calendar.