Checking the pattern

While US stocks received a sentiment boost from news of a potential US-Iran agreement to reopen the Strait of Hormuz, the tech sector has arguably continued to be the primary driver of short-term market momentum. And AI-driven semiconductor trading has usually had a hand on the wheel.

The momentum has cut both ways, as we’ve seen on a small scale this week. When US stocks rallied sharply on Monday, the Nasdaq 100 (NDX) tech index jumped 3.1%—nearly twice as much as the S&P 500 (SPX)—while the PHLX Semiconductor Index (SOX) soared 5.5% to a new record high. On Tuesday, while the SPX pulled back 0.6%, the NDX fell 1.9% and the SOX tumbled 5.7%.

While high-profile “memory” stocks like Micron (MU) and Sandisk (SNDK) have been the recent focal point of chip-sector activity, the buying has spread to the much wider range of lower-profile stocks, many of which fall under the “semiconductor equipment and support” banner—companies that provide the specialized services and products that help the chip designers and manufacturers do their thing.

One example: Veeco Instruments (VECO), a company that has been around since 1945 and has traded publicly since 1994. Traders who hadn’t heard of it before may have noticed it on Tuesday’s LiveAction scan for high put options volume, thanks to a 1,600-contract trade in the July $55 puts:

That contract also had the highest open interest (OI) of all VECO options (2,100), calls or puts, and was one of only two with OI above 1,000 (the July $45 put was the other).

This put activity occurred on a day the stock fell more than 7%, which was especially notable because VECO had soared 42.1% over the previous six trading days as it broke out of a nearly six-week trading range:

As of Monday, the stock was trading at its highest level since October 2000 and was up nearly 191% for the year. For perspective, since 1994, VECO had gained this much or more in a six-day period only 15 other times, and it did so while hitting its highest high in at least three months only two other times.

It’s not a perfect analog, but looking at a larger collection of similar moves—six-day rallies of 25% or more that also set the highest close of the past month—suggests VECO’s Tuesday pullback wasn’t necessarily out of the ordinary. The stock has made 38 other six-day moves like these, and not only was it more likely to close lower the next trading day (67.5% of the time), it was more likely to be lower one week and two weeks later—in 27 of 37 instances, or 73% of the time, in both cases. Also, 15 of the 25 times VECO closed lower the day after the six-day rally, the stock’s loss was larger after one week.¹

Whether the stock will continue to follow this pattern of short-term weakness will depend on many factors, including the market’s continued enthusiasm for the longer-term AI story. On that topic, Daniel Skelly, Head of Morgan Stanley's Wealth Management Market Research & Strategy Team, offered the following insights in late May:

“AI and a resilient economy remain the market’s primary narratives, but it’s worth considering how the story may evolve in the coming months. The market’s concentration in semiconductors, IT hardware, and power…has been extreme. The extent of the recent rally suggests it may now be better to hold than to add to positions. The history of tech suggests AI will be less compute and energy intensive a year from now, which implies less demand for some of the market’s current leaders. We could be looking at a situation similar to the mid-1990s when, after a record-setting surge, semiconductor outperformance slowed and the rest of the market caught up.”

Today’s numbers include: mortgage applications (7 a.m.), Retail Sales (8:30 a.m.), Business Inventories (10 a.m.), Pending Home Sales Index (10 a.m.), Atlanta Fed Business Inflation Expectations (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), Fed interest rate announcement (2 p.m.).

Today’s earnings include: Jabil (JBL), CarMax (KMX).

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¹ All figures reflect Veeco Instruments (VECO) closing prices, 1994-2026. The pattern described consisted of a day VECO closed with a 25%-or-larger gain over the most recent six days, following a day it closed at its highest level in at least 92 trading days. Supporting document available upon request.