Momentum Shifting

The tone has changed for the Stock Market. A sell-the-news wave has returned. Tech is feeling it the most. It started with Microsoft on Wednesday. Intel got smoked Friday, despite a very solid double-beat on earnings. The Tech-heavy NASDAQ declined for the second consecutive week. That’s the first time since May. The issue is the forward guidance. The future is still hard to predict. Add this to the increasing virus cases and economic slowdown, the result is a possible, and necessary, correction from very excessive valuations. Tensions with China are also contributing to the selling. But rather than wonder why there’s a new wave of selling, the more difficult and obvious question was, why did stocks continue to go up so much, so fast?

Momentum stocks reversed lower this week. That’s new. The FAANG group (Facebook, Apple, Amazon, Netflix and Google) declined for 4 straight days and the 7th time in the last 10 sessions. These are the leaders. Apple, Amazon and Google report earnings next week.

The Tech sector, which has been the engine of the Growth trade, has been slowing of late. It’s also the largest. To say Tech stocks have been dominant is a complete understatement. Their valuations have become extremely expensive, but this has been the case for years. It’s important to understand these conditions exist. It’s not necessarily a reason to sell, as many of these stocks reflect strong companies with innovative businesses supremely positioned for continued success. A healthy correction simply addresses the excesses.

We all know that Growth has been dominating Value for the better part of a decade. A rotation seemed ripe but buying the cheaper, Value stocks without momentum has been a disappointing venture for investors. The trend might have turned this week. The spread between Growth and Value has rarely been wider than right now. In fact, Value stocks traded at the widest spread to Growth in history just last week, before the Tech sell-off began.

The Value stocks in focus now are generally mature companies with large dividends. Many are the traditional Blue Chip stocks found in the Dow. Unlike most in Tech, they’re cheap. They’re considered cheap for a reason. They’re not growing. But some are considered safe.

The Dow and S&P have been rotating sideways since the first week of June. They tried to break out earlier this week, but that failed. Gold hit its all-time high of $1900 for the first time since 2011. The price of Gold jumped 5% this week alone, while stocks sold off. The more volatile Silver flew over 17%, hitting multi-year highs. Precious metals are doing well amidst the uncertainty.

The re-opening process is facing complications as the virus continues to spread. Tensions with China and the heated Presidential election are likely to keep the Market under some pressure. Momentum is slowing in the Economy and Stock Market while it increases in politics and geopolitics. We expect the recent volatile price action to continue. It’s going to be a bumpy ride to November. We just don’t see a smooth path ahead.

As I’ve said before, I am always reminded, the Stock Market always goes higher than you think it will. And when it turns, it goes lower than you think it can. We shall soon see. We are prepared.

The world is far from perfect. But of course we already know this. And as my favorite philosopher Yogi Berra said, “If the world were perfect, it wouldn’t be.”

Have a nice weekend. We’ll be back, dark and early on Monday.


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