Rotation, not liquidation: Tech remains under pressure as broader market advances

Stocks came charging out of the gate Monday as investors went bargain hunting after Friday’s beating. Futures suggested a higher open and they were right, plunging oil prices helped set the mood, offering relief on inflation and giving buyers another reason to step in.

The eco data remained positive…. both the S&P and ISM PMI’s remain in the expansion zone, the Prices Paid component falling even more than the estimate – coming in at 75.2 rather than 77.2 and below last months read of 77.9 – suggesting prices paid by manufacturers should start to fall and that is a positive as well.

But the rally couldn’t hold. Why? Because cheaper oil doesn’t answer the questions hanging over the tech sector …Margins, growth rates, financing AI and spending on AI. And so, the early morning buying wasn’t enough to stop the continued selling in technology.

But don’t confuse the index with the whole market. Most stocks advanced - just look at the Equal Weight S&P, which gained 0.7% while the traditional, market-cap-weighted S&P fell 0.5%, and the Nasdaq lost 1.1%. Why? Because the biggest tech names carry so much weight that their declines overwhelmed gains elsewhere. The average stock had a better day than the headline indexes suggest. And that suggests that buyers were more willing to put money to work in other sectors.

At the end of the day – the Dow rose 0.4%, the S&P lost 0.5%, the Nasdaq lost 1.1%, the Russell lost 0.2%, the Transports gained 1.5% (think lower oil), the Equal Weight S&P gained 0.7% while the Mag 7 gave up 0.7%.

And here is where you see the divergence - 8 of the 11 S&P sectors ROSE…Consumer Discretionary took the lead – up 2.4% (but remember it has been an underperformer all year), Financials +1.8%, Basic Materials + 1.7%, Consumer Staples + 1.6%, Industrials +1.4%, Real Estate +1%, Utilities gained 0.6% while Communications added 0.4%.

Away from there – we saw strength in Homebuilders + 3.6%, Retailers +2%, Airlines rose 4.2% (again think jet fuel), The Value Trade was up 0.2%, Aerospace & Defense + 2.4%, and of course as you might expect – the Dividend Aristocrats—NOBL gained 1.8%. These are S&P companies across a range of sectors that have increased their dividends for at least 25 consecutive years.

Energy was weak – down 4% - think plunging oil prices, Tech down 3% and Healthcare lost 0.2%.

And the whole tech sector went lower too… Disruptive Tech – 2.2%, Cyber -4.2%, Semis -3.8%, Software – 2.3%, Memory – 3.5%, Quantum – 2.3%. etc.

Ok – so what this tells us is that money is finding other places to go. That tells you investors are willing to own stocks…but remain uneasy about the crowded tech trade. The issue we need to consider is whether the broader strength eventually helps stabilize technology - or whether the continued tech weakness starts dragging everything else down.

For now, buyers haven’t disappeared…they’ve just become more selective. And that is true in TECH as well. Remember—there are two sides to every trade. Every trade has both a buyer and seller…. The question is at what price? And as long as there are anxious sellers, buyers will take advantage and prices will remain under pressure.

But we shouldn’t dismiss the reversal either. After Friday’s beating, the sharp drop in oil gave buyers a reason to step in. Lower energy costs offered some relief on inflation, while falling long-term yields provided another potential support for stocks. Yet even with those positives, the early technology rebound faded.

That tells you confidence remains fragile. Investors may see better prices, but they still want answers about spending, financing and returns before committing more money to the same names that led the market higher.

Bonds…..did very little…. The TLT lost 0.15% while the TLH lost 0.2%. The 10-yr ended the day yielding 4.91%. The 30-yr ended the day at 5.30%. This morning they are unchanged.

Oil fell out of bed….. WTI lost 7.6% or $7.86/barrel to end the day at $96.26. Iran now wants to make a deal…. The Iranian President telling us that the supreme leader has given the ‘ok’ to continue negotiating. Trump confirms that progress is being made and then it wasn’t’….. This morning oil is trading at $97.40 – up $1…. overnight, reports of a US strike on Iran’s Qeshm Island and Iranian warnings that a deal remains far off put some of that risk premium right back in. Talks continue…but the risks haven’t disappeared – and we’ve seen this movie before.

Gold –rallied a bit – closing up $72 to end the day at $3,946…. but failing to pierce $4,000. This morning gold is trading at $3,905. We remain in the $3500/$4200 trading range.

After the bell – we heard from AAPL and PLTR – among others, but these were the ones to watch. And once again we can point to ‘priced to perfection’ as the cause of this morning’s weakness.

AAPL delivered a report that looked encouraging at first glance…but the outlook gave investors another reason to sell.

Quarterly revenue rose 12% to $114.5 billion, beating expectations, while earnings of $2.10 topped the estimated $2. Strong iPhone and Mac sales helped offset disappointing results from China, iPads and wearables.

They expect holiday revenue growth of 7% to 10%, above the 6.1% Wall Street anticipated. And yet, they are selling the stock!

Can you say MARGINS? Apple expects holiday-quarter gross margins of 45% to 46%, that is BELOW the expected 47%, as higher memory costs and expenses tied to its new Siri AI assistant weigh on profitability. Supply constraints could also prevent the company from satisfying the demand for its new products. And that is why the traders and algo’s are selling it…… This morning the stock is down 4.5% at $323.17.

And then came PLTR – and like AAPL - they also delivered better-than-expected results…and still couldn’t escape the selling.

Revenue surged 96% to $2.31 billion, adjusted earnings of 44 cents beat the expected 41 cents, and management raised its full-year outlook. US commercial revenue even surpassed US government revenue for the first time.

So, what’s the problem? The PACE of growth. Fourth-quarter revenue guidance of roughly $2.65 billion topped the expected $2.46 billion…but implies approximately 15% growth down from 20%.

Those are still great growth numbers. But PLTR trades at 80 x’s forward earnings and so, expectations are enormous…. this morning – the question is whether that pace can justify the valuation – and apparently it cannot…. It is trading down 6% in the pre-market.

And there you have it - both beat headline expectations, but investors found concerns in what comes NEXT. For Apple, it’s thinner holiday-quarter margins. For Palantir, it’s slower sequential growth and pressure on profitability. Strong results still matter…but so does the price investors have ALREADY paid for them.

And that brings me back to the beginning - Is the selling in tech overdone? And is the selling over? Apparently, not yet.

Eco data today includes – the JOLTS report, Factory orders, Durable Goods orders.

Earnings – we’ll here from 30+ companies…. The ones that may draw the most attention include: PFE, SHOP, AMD, ANET & AMGN – representing Healthcare/Pharma, Tech/E-Commerce, Tech/Semi’s, Tech/Cloud and data centers, Healthcare/Biotech.

European markets are all lower – down between 0.5% - 0.8%.

US futures are mixed… Dow futures down 300 pts, S&P’s down 9 pts, the Nasdaq is bucking the trend and is up 68 pts while the Russell is flat.

The S&P closed at 7,541 – down 38 pts. - leaving us in the 7500/7800 trading range that we have been discussing. The Nasdaq continues to hold its long term trendline – this morning Nasdaq futures are struggling to hold the line…. My gut says we will test it for a third time. Should it fail – 24,000 becomes the bullseye – down 2% from here - and if that happens – the Nasdaq will be officially in ‘correction territory’ (as of last night – it is down 9.2%).

Today is the midterm elections and that only adds another source of uncertainty to an already nervous market…..If you are properly diversified, parts of your portfolio are under pressure, while the other parts are fighting to stabilize…Remember – we are NOT seeing an all-out flush and that is important.

Rigatoni and eggplant in a brie cream sauce

Prep time: 15m

Cook time: 20m

Total time: 35m

Serves: 4-6

Ingredients

1 lb Rigatoni

2 Packages of Brie (without the skin)

2 Large Eggplant

Sun-dried tomatoes (not the oil)

Fresh Basil

s&p

Olive oil

Preparation

Step 1

Bring a pot of salted water to a rolling boil so it’s ready.

Step 2

Start by peeling the eggplant, then cut into bite sized cubes. Place on a paper towel, salt and let sit for 15 mins. 

Step 3

Then fry the eggplant until it is nice and golden brown. Remove and place on paper towels again to drain.

Step 4

Add pasta to water and cook for 8 mins.

Step 5

In a food processor – blend the brie, the sundried tomatoes, 4 basil leaves and a ladle of pasta water.  Blend until it becomes cream, not a sauce.

Step 6

Now strain the pasta, always setting aside a mugful of pasta water.  Add the pasta back to the pot, add 2 scoops of the brie cream and some of the pasta water.  Mix and serve immediately garnished with the fried eggplant.   Delish.