Trending
Major equity indices are suffering from a bout of unintentional bipartisanship. Leaders of both major US parties created news that is sending semiconductor stocks lower, taking much of the technology sector with them. In turn, this is leading to the sort of sell off that we discussed last week. Aggressive selling of the market leaders are dragging the key indices down sharply.
While today’s decline hasn’t broken the long streak of days without a 2% decline in the S&P 500 (SPX) – at least by midday – if we hold the current -1.25% drop, it would become only the 8th time this year when SPX closed down by more than 1%. As we noted yesterday, that compares to 15 days with a greater than 1% gain this year. The Nasdaq 100 (NDX) is bearing the brunt of the damage, down about -2.5% by noon. All of the “Great Eight” stocks – the Magnificent 7 plus Broadcom (AVGO) – are down today. Considering that those stocks comprise about a third of SPX’s weight and just under half of NDX’s, it’s essentially impossible for those indices to overcome aggressive selling in tech stocks.
Yet there are some signs that key elements of the rotation trade are still with us. The Dow Jones Industrial Average (INDU) is actually higher by about 0.5%. I prefer not to focus upon that measure because it is a narrow, curated, price-weighted group of 30 stocks, but it is notable that 23 of the 30 stocks are higher right now, with two of the Mag 7 — Apple (AAPL) and Microsoft (MSFT) – among the minority of decliners. The Russell 2000 (RTY), which was up a scorching 10% in the five sessions prior to today, is down by “only” -0.8%. NYSE decliners are outpacing advancers by roughly 1.4:1, while that ratio on Nasdaq is about 2:1 for the decliners. And importantly, the ETF that is linked to the Rusell 1000 Value Index (VONV) is up marginally, even as its Growth counterpart (VONG) is down by more than -2.5%. That’s hardly a broad-based rout, even if key indices say otherwise.
Hence the portmanteau “routation” that we proposed in the title.
The tech stocks that are getting clobbered are the ones who have driven most of the gains that we have enjoyed this year. Investors should be able to withstand a few down days in those names. It might even be somewhat beneficial if selling reduces the sky-high expectations priced into these stocks as earnings season looms. The key to the coming days will be whether the dip buyers stabilize the stocks and whether money continues to flow into other sectors. If those occur, then we can consider today a bit of pressure relief in an overheated market. The concern should be if we see continued selling in the major tech names, whether it is simply a momentum reversal or a negative reaction to an earnings miss. That could turn into something worse – and today’s rise in VIX might be reflecting nervousness along those lines. Stay tuned.
Related: Pressure Drop