Dave Moenning

One-Day Wonder Or The New Trend?

Well, that was interesting. In what can probably best be described as a fast money rotation game (something I like to call “Hedge Fund Follies”)- where traders sold the big-cap tech leaders and continued to buy the beneficiaries of the tax reform and the improving economy themes with both hands – the DJIA posted a triple-digit gain, while the NASDAQ 100 endured a triple-digit loss.

Yep, that’s right fans; the FANG’s had a bad day at the office while the banks and transports soared. Such is life at times in the stock market game. Odd yes, but definitely not unprecedented.

For those keeping score at home, the FANG’s did indeed have a rough outing. Facebook (NYSE: FB) fell 4%, Amazon.com (NASDAQ: AMZN) lost 2.71%, Netflix (NASDAQ: NFLX) dove 5.54%, and Alphabet (NASDAQ: GOOGL) dropped -2.44%.

But the losses weren’t limited to just the FANG’s as the semiconductors, which have been on quite a run since the middle of August, also got hit hard. For example, the Semiconductor Index declined 4.39% yesterday with components such as Micron (NYSE: MU) and Lam Research (NASDAQ: LRCX) suffering losses of 8.7% each and Applied Materials falling (NASDAQ: AMAT) 7.7%.

But before you get into a lather about selling the semis and/or the rest of your big-cap tech and heading for the hills, consider that the Semiconductor Index had soared 26% from mid-August through last Friday. As such, a pullback – yes, even a nasty one – was to be expected.

It is also worth noting that the NDX experiences these bad days at the office on a fairly regular basis. As the chart below illustrates, there have been a handful of ugly – albeit brief – periods on the NDX this year.

NASDAQ 100 – Daily

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The question, of course, is if this time will be different. Maybe its the complacency talking, but my gut reaction is, no. In general, tech is where the growth is and after brief bouts of difficulty, institutional investors have tended to calmly and methodically return to the growth areas – once the fast money folks are done with their hysterics, that is.

However, there does seem to be an argument for the it’s-different-this-time camp. Michael O’Rourke, chief market strategist at JonesTrading Institutional Services, summed up the situation for Bloomberg yesterday by saying, “The large tech companies already have low effective tax rates because they were gaming the system… Any reform would have to close the loopholes, which obviously they’re trying to do, so they don’t benefit.”

On the other side of the aisle though, the banks stand to benefit handsomely from tax reform and the higher interest rates that are expected to follow. Perhaps a graph of what is happening in the banks would be worth more than a few hundred more words on the subject here…

KBW Bank Index – Daily

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There is also the improvement in the economy/inflation angle to consider.

Yesterday, we got an update on Q3 GDP that was better than expected as well as a “Beige Book” report that suggests inflation pressures “have strengthened.”

In trader parlance, this equates to an all-out buy signal for cyclical issues. Now mix in the mood of the consumer (one report showed confidence at a 17-year high) and the e-commerce story continuing to improve and, well, traders are falling all over themselves to buy the transports.

Dow Jones Transportations – Daily

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So there you go. Sell the stuff that loses in tax reform and buy the stuff that benefits. Load up the algos and let ’em fly. The FANGs are out and the banks and transports are in. Well, for now, anyway. It will be interesting to see if either of these new themes run out of steam or get overdone by the fast money folks in the near-term.

For now, my thought is to continue to buy the dips – especially the big, bad, scary dips. So, the primary question here is if yesterday’s big dive in tech will continue for a few days/weeks or turn on a dime. Stay tuned…

Thought For The Day:

If you stop learning, you will forget what you already know. -Proverbs 19:27

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Tax Reform

      2. The State of the Economy

      3. The State of the Earnings Season

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


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