Tech Stocks Swoon - Tech Leads Market Lower
Tech Stocks Swoon - The stock market sold off on Monday like I expected because it reached overbought territory on Thursday.
The S&P 500 was down 0.58%. The part of the selloff I was surprised by the was the big decline in the tech stocks as the Nasdaq fell 1.39% and the S&P 500 tech sector fell 1.78%.
The biggest loser in the S&P 500 was Twitter which was down 8%. To be clear, I’m bullish on Twitter in the medium term, which I define as the next 12 months.
Usually, stocks have a few more days of follow through after a major decline. We are getting close to a good entry point in the name.
Netflix was down 5.7% and Facebook was down 2.19%. As you can see from the chart below, the FANG+TM index fell 2.83% on Monday.
This index includes the usual FAANG names plus Twitter, Baidu, Tesla, Alibaba, and Nvidia. It is down about 9% in the past 3 trading days.
Tech Stocks Swoon - 3 Earnings Reports Pushing Down Tech
Facebook, Netflix, and Twitter’s earnings have brought down the momentum cohort. Netflix is down 20% since its recent peak before its earnings miss.
As you can see in the chart below, Twitter stock is down 28% in the past 2 days. Snap joined the selloff on Monday, falling 4.36%.
If these advertising and consumer spending names are seeing weakness, it makes investors question how good the overall economy is doing.
That being said, you can’t get too pessimistic because volatile stocks which have giant moves to the upside, often have sharp corrections.
One bullish opinion on Facebook is that advertisers will pay up for Facebook’s monitoring costs. This would allow Facebook to maintain its margins.
Facebook would need to eventually raise its prices for advertisers by about $2.5 per user to get back to where its margins were before it started investing in maintaining the quality of posts on its platform.
This might be too optimistic because firms might not pay that much to advertise on the platform. Also, it’s tough to grow original posting if the discussion is limited by quality control.
I have seen websites such as Seeking Alpha do a great job of limiting poor quality posts which amplify the good ones. The key for Facebook will be to have clear, objective guidelines.
Sometimes it’s not a clear issue to determine what is offensive and what is spam.
Tech Stocks Swoon - Z-Score Shows The Tech Pummeling
Apple reports earnings on Tuesday and Tesla reports earnings on Wednesday. Those firms could shift the tone of the earnings season for the momentum names back to the positive side. That is, if they beat estimates since Amazon, Microsoft, and Alphabet reported great numbers.
The biggest test for Tesla is if the company can get close to being cash flow positive. Elon Musk has promised the company would achieve that lofty goal in the second half of this year.
Tesla’s stock was down 2.36% on Monday and is below $300, which means expectations aren’t that high.
It doesn’t seem like the selloff in the past 2 days was bad if you look at the Nasdaq and tech sector index.
The chart below makes the selloff look much worse. It shows the relative performance of actively held shares versus passively held shares in each sector in the past 2 days.
In the tech sector, the z-score is above 3 which means there was a huge underperformance in the hedge fund hotels.
Facebook had been one of the most popular investments by hedge funds before its recent report. This was a large blow up as many sold at once.
Tech Stocks Swoon - Tech Sector Is Everything
I usually don’t like the charts which show the percentage one stock or group stocks’ performance is of the total index’s returns. the stat ignores that the up stocks need to make up for the down ones.
With this in mind, look at the chart on the left. It shows the performance of each sector. Technically, tech is 98% of the S&P 500’s performance. However, it’s important to realize, the total gets above 2.65% when you add up the 5 other positive sectors because 5 sectors are down.
Essentially, the other 5 up sectors and the 5 down sectors cancel each other out, making tech responsible for the gains.
Because Netflix and Amazon are consumer discretionary stocks, the big momentum internet names have a bigger impact on the S&P 500 than the tech sector.
As you can see from the chart on the right, the FAANG names gave much more to the performance of the index than it was up in the first half of 2018 because the rest of the index was down. The market always has leaders which means it isn’t more top heavy than usual.
However, just because this isn’t unusual doesn’t make the leaders of the market unimportant. Either the momentum internet names will recover or new leaders will need to take change to get the S&P 500 to reach a new record high.
Tech Stocks Swoon - Great Earnings Season So Far
With the weakness in tech causing the stock market to fall in the past 2 days, it seems like earning season isn’t going well. However, that assumption is incorrect as the results have been strong. As of Monday evening, 278 firms have reported their Q2 earnings. 83% of these firms have beaten EPS estimates. The average EPS growth rate of these firms is 25.4%. 75% of firms beat sales estimates, with an average growth rate of 10.8%.
Tech Stocks Swoon - Treasury Update
Even though there was pessimism in the stock market, the long bond sold off. The 10 year yield was up 2 basis points to 2.97%. The 2 year yield fell 1 basis point, which means the curve steepened. The latest difference between the 10 year and the 2 year yield is 31 basis points. This shows us the weakness in the ‘risk on’ trade was mostly in the FANG names. There is now a 70% chance the Fed raises rates at least 2 more times this year.
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