Tech Wreck Stuns Wall Street As NASDAQ Falls 1.8%; The Biggest Beneficiaries Of Fed Rate Hikes
The stock markets/indices in the U.S. in 2017 could easily have been described in two ways: ‘The Energizer Bunny,’ and ‘The Teflon Stock Market.’ Nothing seemed able to exploit any weakness, nor any bad news that would result in any meaningful selloff. Those descriptions will be put to the test this week — as, we see if we get any follow-through from Friday’s technology selloff. And, just to spice things up, the Federal Reserve is widely expected to hike interest rates by at least .25 basis points — at the conclusion of its two-day meeting Wednesday afternoon, June 14. First, let’s review the bidding from Friday’s tech wreck.
As Ben Levisohn wrote in this weekend’s Barron’s, (June 12, 2017), “stocks were quietly heading to new highs Friday morning, when Apple (ticker: AAPL), Alphabet (GOOGL) and FaceBook (FB), and other tech names [stars such as Nvida (NVDA)] — suddenly fell.” The three aforementioned companies, along with behemoth — Amazon (AMZN), affectionately known as the FANG stocks, have been largely responsible for much of the NASDAQ gains thus far in 2017. Other tech darlings, such as NetFlix (NFLX) and artificial intelligence (AI) darling Nividia Corporation (NVDA), added to the Fang’s momentum. That was…..until last Friday. “By the time of Friday’s closing bell, APPL, GOOGL, and FB each had lost 3 percent (of their value in one trading day), while the NASDAQ index itself closed down 113.5 points, or -1.8, percent, to 6,208 points,” Mr. Levisohn wrote. But, the S&P 500 “stranger still,” Mr. Levisohn added, did not experience anything close to what we witnessed in the NASDAQ, closing down “less than 0.1 percent to 2431.77 points; while the DOW rose 89.44 points or +0.4 percent, to 21,272 points — a new, all-time high.” I would disagree with Mr. Levishon’s describing what the S&P 500 did as “stranger still,” since the NASDAQ has risen much higher than the S&P 500 and DOW, — and, thus, traders and investors were quick to take profit and protect some of their portfolio gains for 2017, especially in the technology sector.
“What sparked the tech wreck?,” Mr. Levisohn asked. “Some market participants pointed to a Goldman Sachs report that circulated Friday [morning], highlighting an increase in “mean-reversion-risk for FAAMG stocks — a quintet of high-flying names, including FaceBook, Amazon, Apple, Microsoft, and Google parent — Alphabet.” I would certainly argue that NetFlix (NFLX) be included; but, I digress. “Then, there was a report from noted short-seller, Andrew Left, of Citron Research, targeting AI darling Nvida (NVDA). whose shares have risen 50 percent this year,” and were up 17 percent for the week last week — until Friday’s selloff. Nvidia shares took a bit hit Friday, closing down 6.5 percent, to $149.60.
“Even as investors dumped the FAAMGs and their cousins, they were snapping up energy and financial shares, which helps to explain the DOW and the S&P 500’s seemingly obliviousness to the carnage next door,” Mr. Levisohn noted. “The S&P 500 Financial Index rose 1.9% [as traders/investors anticipate the Fed to raise rates this week], while the S&P 500 Energy Sector climbed 2.5 percent.” Financials and energy have gone begging for love this year; [and], they have been two of the worst performers.” “A lot of stocks were being looked over,” said Rhino Trading Partners Chief Strategist, Michael Block. “You see how everyone is positioned, and go the other way.”
FYI, “financial stocks are among the bigger beneficiaries of higher interest rates, especially when longer-term Treasury yields rise with them,” Mr. Levisohn wrote, “If Federal Reserve Chief Janet Yellen can pull off a hike; and, convince markets that the U.S. economy is still growing steadily, Friday’s tech wreck could be just a hiccup on the way to higher stock markets.”
For the year, the DOW is +7.64 percent; while the S&P 500 is +8.62 percent; and the NASDAQ is +15.32 percent — even after Friday’s selloff.
Tomorrow morning’s (Monday) open will be important; but, the close of course — even more so. I think tomorrow — all things being equal — is a day to sit on the sidelines and not a time to a ‘hero.’ Also be wary, careful of a ‘dead-cat bounce,’ as it is called on the street, as the market begins to move higher and recover — only to fall faster, and deeper than the previous close. That kind of activity usually portends more selling. If that happens, you may want to consider a gold or precious metals ETF like GLD, GDX, GDXJ, etc., and also take advantage of any sustained technology selloff to buy shares of technology companies that you have wanted to own; but, haven’t because the price was too high. So, it may pay to be a little cautious heading into Wednesday’s Federal Reserve decision on interest rates. But, usually, we do not get such clear indications — otherwise, everyone would be multi-millionaires. Having said that………
The Biggest Beneficiaries Of Fed Rate Hikes
That’s the title of Lawrence Strauss’s timely article in this weekend’s Barron’s. It is late in the evening for me and i do not have the kind of time I would like to devote to this subject — and, I refer you to Mr. Strauss’s article for a detailed analysis. The bottom line to Mr. Strauss’s article is: “small and middle-market banks with large depositor bases, strong balance sheets, and lots of commercial customers will benefit most from this trend,” in a rising interest rate environment.”
“Among the likely winners,” Mr. Strauss contends are: SVB Financial Group (ticker: SIVB), Comerica (CMA), and Zions Bancorporation (ZION).”
Remember, while Mr. Strauss may well be right, be sure to do your own due diligence and homework; understand your risk tolerance and time horizon; and, know that there are no guarantees. But, my own philosophy is, you can’t make money — certainly not a lot of it — if you aren’t willing to risk it. That doesn’t mean being excessively reckless and always taking big gambles, but, taking some chances, after you have weighed the pros/cons and made an informed judgment. Good luck, whatever you decide. V/R, RCP