The ugly sell-off in tech names is not necessarily an indication that the broader market is about to crack, but there could be a summer swoon, analysts say.
The worst of the selling came just at the open, and by the closing bell Nasdaq closed down just a half percent at 6,175, reversing much of a 1.6 percent loss earlier in the day. Apple traded as low as $143, but closed at $145.42, off 2.4 percent after it was downgraded by Mizuho to neutral from buy.
The Technology Select Sector SPDR XLK ETF dropped more than 2 percent in morning trading, but finished down just 0.3 percent and was turning higher in after hours trading.
“They’ve done great. What, are they up 30 percent year-to-date? That’s a natural rotation. That’s what I’m going with,” said Jack Ablin, CIO of BMO Private Bank. “As long as I’m seeing other sectors rally, to me it’s a rotation.”
The sector has some of the highest valuations in the market. The top five drivers of the big cap tech gains — Amazon, Apple, Facebook, Microsoft and Alphabet — as of last week, had contributed about 40 percent of the S&P 500’s gains this year, though they represent just 13 percent of the index, according to Goldman Sachs.
Ablin said, however, the Federal Reserve could change his view if the Fed’s post-meeting statement Wednesday or Fed Chair Janet Yellen indicates the central bank would move soon to reduce market liquidity by reducing its balance sheet.
“It’s very likely we’re sitting at the North Pole right now. It’s not going to go higher,” he said. “If this is as good as it gets, and it stays there, then it’s fine, but if we hear any indication on Wednesday that the Fed’s going in a different direction, I think investors are going to reassess their risk posture. But right now, we don’t know, and this could be a simple rotation.”
Energy stocks and telecom were the beneficiaries of the sell-off in tech on Monday. The S&P energy sector was up 0.7 percent, while telecom rose 0.9 percent. Financials were up 0.2 percent, after a sharp gain Friday when technology was harder hit.
David Bianco, Deutsche Asset Management chief investment strategist, said he does not see the tech sell-off as the warning for a big correction or a breakdown in the technology and internet names. But that doesn’t mean he doesn’t expect a broader decline soon.
“My view is that I do agree with the idea that it’s time for a summer consolidation, and likely a small dip that likely plays out over the coming months, not necessarily the coming week,” he said.
Bianco said the market is anxious and it’s waiting to see whether Congress can get to work on tax reform. While it’s unlikely there will be a plan before August, it needs to present something after the summer recess.
“There’s no fundamental canary in the coal mine in tech whatsoever,” he said.
Bianco disagrees with the view that the trading into energy, financials and industrials in the past several sessions indicates that the “Trump” trade or reflation trade is back on.
Some traders said the testimony from former FBI director James Comey was a positive in that it showed that Trump was not a target of the investigation into Russia and the Trump campaign. It also did not contain any smoking guns.
“It’s not Trump. It’s … ‘Can Congress agree on what they were sent there to do — cut corporate taxes?'” Bianco said.