U.S. equities moved lower on Monday as the Big-Tech stocks were hit once again with panicked selling. But while the overall averages drift lower on sympathy, volatility was relatively constrained.
Why? Because while the market is fragile, the bears aren’t able to muster enough strength to actually rattle anything larger than a few sectors.
As a result, we’re seeing intense sector rotation in play, as the bulls flee from the likes of Apple Inc. (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN) and regroup in areas of value such as industries and energy. Small-cap stocks are perking up as well, setting the stage for the first possible upside breakout since the post-election rally fizzled in December.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 gave back 0.1%, the Nasdaq Composite dropped 0.5% and the Russell 2000 lost 0.2%. Treasury bonds were little changed, the dollar was mixed, gold lost 0.2% and oil rose 0.5%.
Breadth was mixed, with advancers and decliners evenly matched, while volume was solid at 107% of the NYSE’s 30-day average. Defensive telecom stocks led the way with a 0.9% gain while technology stocks were the laggards down 0.8%.
NutriSystem Inc. (NASDAQ:NTRI) gained 4.7% on an upgrade to buy from analysts at Sidoti citing valuations following a recent pullback. General Electric Company (NYSE:GE) gained 3.6% after CEO Jeffrey Immelt announced he will step down on August 1. AAPL fell 2.5%, catalyzing the tech-stock weakness, after being downgraded to neutral at Mizuho Securities citing valuation. Advanced Micro Devices, Inc. (NASDAQ:AMD) fell 1.6% as Goldman pooh-poohed the recent rise on cryptocurrency mining hopes.
Conclusion
The remarkable reliance the market is showing here — especially heading into the Federal Reserve policy decision on Wednesday — is likely tied to expectations that the Fed will lower its inflation forecast for the rest of the year. Similar to what the European Central Bank just did, even if combined with the expected quarter-point rate hike this will be considered “dovish” and could unleash a small-cap led breakout from the current seven-month consolidation.
Big Tech stocks are likely to continue to struggle here, however, as the flavor-of-the-month switches from growth to value amid more difficult economic conditions. The “Trump-flation” trade gave way to a mini tech stocks bubble, and is now giving way to another episode of the “Goldilocks” central bank trade we’ve seen oh so frequently: Economic growth is steady but shallow; enough to avoid recession but not enough to drive central bank hawkishness.
But if Tuesday’s producer inflation and Wednesday’s consumer inflation data surprises meaningfully to the upside, all bets are off on this scenario.
Check out Serge Berger’s Trade of the Day for (DAY).
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
