Facts vs. Feelings: Dissecting Monday's Tech Pullback
Concentrated Leadership?
Feeling: For much of 2023, many investors have complained about a thin market with weak leadership outside of a handful of mega-cap tech stocks. To a large extent, the complaints are correct. The FANGMAN stocks are comprised of Facebook or Meta Platforms (META), Amazon (AMZN), Nvidia (NVDA), Google now Alphabet (GOOGL), Microsoft (MSFT), Apple (AAPL), and Netflix (NFLX), and are off to a near-unprecedented start after a ferocious rebound in the first half of 2023. Before pulling back, the Nasdaq 100 ETF (QQQ) was higher by 39% for the year.
Image Source: Zacks Investment Research
Fact: Though the “FANGMAN” stocks comprise a more significant portion of the pot than ever before, this trend is not new and has persisted for years. Furthermore, Monday’s action provides investors with a hint that the pendulum may soon be ready to swing back in the opposite direction. Though QQQ was down 1.34% Monday, the Direxion Nasdaq 100 Equal Weight ETF (QQQE) was green. In other words, leadership is broadening out beyond big-cap tech and into other parts of tech.
Monday’s pullback also provided subtle signs that the market is broadening to more than just tech. The iShares Russell 2000 ETF (IWM) and Dow Jones Industrial Average (DIA) gained ground – a sign that investors may have a renewed appetite for small-cap stocks and “old economy” stocks such as Deere (DE). Meanwhile, while the Nasdaq and S&P 500 Index broke lower late day, 67% of stocks advanced for the session.
Image Source: Zacks Investment Research
Feeling: Tech, specifically chip stocks, have run too far, too fast.
Fact: The pullback in large-cap tech is of little surprise to those who have been paying attention. With the Nasdaq up almost 40%, stocks like Meta Platforms up nearly 200%, and sentiment at the “greediest” levels of the year, a pullback was due. Also, large-cap stocks like Apple have marched back to all-time highs – a level where initial resistance is common.
Image Source: Zacks Investment Research
Now the question is, “How long and deep will the correction last?”. For now, QQQ is retreating to the 21-day moving average for the first time in ages – a zone likely to see support in the short-term.
Image Source: TradingView
Takeaway
Despite the S&P 500 and Nasdaq retreating Monday, the market showed underlying strength “beneath the surface”. While large-cap stocks that have gone on big runs pulled back, the rally broadened. Investors need to eliminate the misconception that a broad market rally means all stocks move up at once. Often tech stocks will grind higher for a few weeks and digest while old economy/small-cap names take the baton (rotation). Though this year has been highly skewed toward large-cap tech, we are seeing the phenomenon mentioned above play out. While the action in equities was “normal” Monday, if you are in extended tech stocks its imperative to know your time frame.
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