Market Strategy Radar Screen Weekly June 12, 2017

 Can’t Judge a Book by its Cover

We suggest that investors don’t jump to conclusions about Friday’s drop in tech prices

A question of semantics linked to what we believe is a misperception of “what’s going on” roiled tech stocks more in perception over the weekend than in overall market action last Friday. Among the phrases and words used by some commentators to describe the selling of tech stocks last week were: “massive,” “tech wreck,” and “rejection of tech stocks,” among others. The week ahead should provide some clarity as to whether Friday’s move lower for tech will have further ramifications for the sector (or the market) of more than of a day or two.

For now it looks to us like the market may simply have found a catalyst to justify some additional profit-taking (remember the S&P 500’s 1.8% one-day decline on May 17?). The market also used tech sector selling Friday as an opportunity for sector rotation. It was no secret that there was concern being expressed by some investors and pundits about the significant role the “FANG” stocks (Facebook, Apple, Netflix and Google) or the ”FAMG” stocks (Facebook, Apple, Microsoft and Google) stocks have had in pushing the S&P 500 to more than twenty record highs thus far this year. According to this week’s Barron’s, the so called “FAANG” stocks (Facebook, Apple, Amazon, Netflix and Alphabet/Google) had accounted for two fifths of the S&P 500’s gains this year—reason enough we’d think for some investors to take a little money off the table in the tech space.

It’s also well known that growth stocks (particularly in Technology) have provided the market’s leadership this year and significantly outperformed value stocks. Now with concerns voiced around the market that the Trump Administration’s planned stimulus agenda could be diverted for a period yet unknown due to political wrangling—and with economic growth “sans stimulus” likely to keep pace at around 2-2.5% annualized— investors (particularly those not steeped in deep conviction about the case for growth stocks) are looking to value stocks for possible leadership in the second half of the year.

On Friday the Energy, Financials and Materials sectors, each of which has lagged (in varying degrees) in the market’s rise of late, became the market’s leaders for the day, respectively rising 2.5%, 1.9% and 1.3%, as tech fell 2.7%.

The spate of selling in technology in our view provided skeptics, bears and volatility-starved shortterm traders a taste of “pre-weekend drama.” It looked more to us like Tech stocks (particularly large cap leaders in the recent rally— the FANGS or FAMGS, which had soared since a few weeks after the Presidential inauguration), were an easy target for a haircut via profit-taking after a great run-up from the start of December 2016 through last week. The overall modest decline in the sector as well as somewhat larger declines among the individual stocks (the FANGS or FAMGS) was taken by at least some skeptics and bears as opportunity to use descriptive phases such as “tanked” and “plunged”, which seemed to us very much out of synch with what happened.

The Surprise Post-Election Tech Stock Rally

Beyond the noise Friday it’s worth recalling the irony that from the initial surprise election result until quite sometime after the inauguration of President Trump tech stocks were expected by some to be disfavored by the new administration when (and if) Congress implemented the President’s agenda. That thought was debunked fairly quickly.

In a world in which tech is ubiquitous, serving both business and the consumer, the Information Technology sector remains one of our favorites in the S&P 500. Its substantial weight in the S&P 500 (at over 22% of the benchmark, currently its largest sector) causes us to market-weight the sector in our S&P 500 allocation though we have expected it and continue to expect it to be an outperformer.

Low Volatility May Be a Factor

Lastly, it seems to us that the recent dearth of volatility in the VIX along with a string of record highs posted this year by the major equity benchmarks has created a “hair trigger effect” when investors react to a fillip of volatility or reversal of market direction or expectation, and this exacerbates any nervousness moving through the market on any given day.

This week investors will be focused on the Federal Reserve’s decision when policy makers exit the FOMC meeting at 2pm on Wednesday. Fed Funds futures indicate a greater than 97% chance priced into the market that the Fed will raise its benchmark rate by 0.25%.

If the Fed hikes the rate as expected we believe it will provide the market with confidence that the economy is growing at a sustainable pace.

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