Short Mag-7/ Long Forg-2000?
US stocks fell on Friday as worries over a global IT outage calmed, with Wall Street looking for recovery from a sell-off that saw the Dow snap a run of wins and a tech rout continue.
The Dow Jones Industrial Average slipped roughly 1%, coming off a drop of over 1% for the blue-chip index. The S&P 500 fell 0.7%, while the tech-heavy Nasdaq Composite declined 0.8%.
Stocks are facing weekly losses after a wobbly handful of sessions that saw a dive in techs, with AI-focused chip stocks bearing the brunt. Investors are rotating out of the tech heavyweights that have fueled the recent rally and into small caps, seen by some as benefiting more from interest-rate cuts.
In the early hours, investors assessed the potential impact of an "unprecedented" failure in computer systems worldwide that grounded flights and hit banks, telecoms and media companies, among others. But concerns eased after CrowdStrike (CRWD) said a fix was in place for the glitch, a botched update that affected Microsoft-based (MSFT) systems.
CrowdStrike shares plunged as much as 20% as the outage spread, but pared losses to around 10% by afternoon trading. Shares in Microsoft — which was working on problems with its Azure cloud services — were down less than 1%.
Meanwhile, Republican presidential contender Donald Trump used his nomination speech on Thursday to say he would "end the electric vehicle mandate on day one." His comment comes as the market wakes up to the "Trump trade" — the implications of his policies for assets if the former president takes the White House.
Tesla falls 4% after Trump says he will end 'electric vehicle mandate'
Shares of Tesla (TSLA) and other EV makers fell on Friday, along with the broader market.
Electric vehicle stocks were under pressure on Friday after former President Donald Trump criticized the Biden administration’s clean energy initiatives, referring to them as the “green new scam” during the Republican Convention.
Trump said, "I will end the electric vehicle mandate on day one, thereby saving the US auto industry from complete obliteration, which is happening right now, and saving US customers thousands and thousands of dollars per car.”
The comments were made despite an endorsement from Tesla (TSLA) CEO Elon Musk. Shares of the EV giant sank as much as 4% on Friday. Rivian (RIVN) and Lucid (LCID) were also down more than 1%.
The Biden administration doesn't have an EV mandate, but critics point to the Environmental Protection Agency's auto rules aimed at lowering carbon emissions introduced in March as a way of accelerating electric vehicle mass adoption.
Chip stocks slip again, set to end week with heavy losses
Chip stocks retreated on Friday, set to the end the week heavily in the red.
Nvidia (NVDA) dropped more than 2% during the session. The AI heavyweight is on pace to end the week with losses of more than 8%.
Chip equipment maker ASML (ASML) also declined on Friday, on track to tally a decline of 17% over the past five sessions.
The selloff in semiconductors went into full gear earlier this week as geopolitical headwinds emerged. Investor worries grew over a report regarding the possibility of tighter US restrictions on exports of semiconductor technology to China.
Recent comments from former president Donald Trump said during a Bloomberg interview about Taiwan, a major chip manufacturing hub, also helped spur a sell-off.
It's Friday and it's been a crummy week for the stock market since Wednesday.
The question on my mind and that one everyone's mind is whether the Mag-7 selloff is for real and whether the rally in small-caps has legs or is it just another head-fake?
Let's first look at the Nasdaq:
It definitely is selling off hard lately but it remains in a nice uptrend so we don't know if this latest drop is just a small pause before it takes off again.
Even looking at the chart of Nvidia below, I definitely want to see more weakness next week before confirming a downtrend here:
Same with shares of Tesla which remain in an uptrend despite this week's selloff:
Nvidia and Tesla set the tone for the Nasdaq and every major hedge fund trades them so you kind of have to pay attention to these two stocks.
This is especially true for Nvidia which Francois Trahan rightly notes has singlehandedly carried the tech sector higher this year:
It is kind of stunning to think that half of the top sector's performance this year has come from just one stock?! We've seen one sector carry the market a few times over the years, but I can't think of another instance in U.S. markets where one stock made such an impact. pic.twitter.com/djRVzo3QGH
— Francois Trahan, M²SD (@FrancoisTrahan) July 19, 2024
Reminds me a bit of the old Nortel days when it made up 38% of the TSX at its peak (no, Nvidia isn't Nortel but the outcome will be the same).
Then there's Martin Roberge at Canaccord Genuity who notes this in his weekly wrap-up on souring Mag-7 sentiment:
The S&P 500 is down ~2% while the S&P/TSX is more or less flat for the week. Growth stocks bore the brunt of selling pressures and their heavy index weighting explains most of the weekly drop in the S&P 500. Meanwhile, value stocks benefitted from rising odds that the Fed would cut rates in September and that Trump would win in November. In all, value stocks (VTV-US) are up ~0.5% this week and growth equities (VUG-US) are down ~4%. On commodities, the bullion hit new all-time highs, protecting investors against increased volatility and inflation expectations. Crude oil ended the week down ~2% as demand concerns more than offset falling US crude inventories. Speaking of demand, copper prices plunged (-8%), hit by slower-than-expected growth in China (more below) and likely insufficient stimulus efforts. Otherwise, expectations that a Trump administration would eliminate subsidies on EV and renewable energy initiatives also likely contributed to downward pressures on copper, in our view.
Our focus this week is on the ongoing sentiment shift toward the Magnificent 7 (MAG-7). As we show in our Chart of the Week, cracks are starting to show in fundamentals. Indeed, growth in forward sales, earnings and cash flow estimates appears to be peaking out and relapsing. Importantly, similar episodes coincided/preceded phases of underperformance vs. the S&P 500. We first flagged the vulnerability of MAG-7 stocks in our June 26 note, but quite frankly, a catalyst was missing to initiate a rotation into value and defensive stocks. Since then, a soft CPI last week cemented expectations for a Fed rate cut in September. Also, a potential Trump victory in November increased the appeal of value stocks. In fact, the ongoing rotation away from the MAG-7 is consistent with the view that value would benefit from a fossil fuel-friendly Trump administration whose agenda also proposes deregulation, tax cuts, tariffs, onshoring activities and otherwise potentially rising inflation expectations. Admittedly, growth now looks somewhat oversold in the short-term using a 13-day RSI while value and small-cap stocks exhibit overbought conditions. But despite the pullback, MAG-7 stocks still trade at nosebleed valuations ~32x forward earnings. By comparison, US value stocks (18.8x) and international equities, as measured by the MSCI World Ex-US index (14.4x), offer investors a much cheaper valuation launchpad. In this context, we believe we could be in the early innings of a correction in growth stocks and the rotation into value/international equities, as we showed Wednesday.
It's earnings season so we shall see how the Mag-7 stocks respond post-earnings because if large investors sell them no matter how good the news is, well that's a clear indication sentiment is souring on them.
As far as small-cap shares, they popped and dropped recently:
What remains to be seen in the following weeks is whether this rally in small-caps has any legs or was it just another head-fake. On the 5-year weekly chart, it looks real to me:
But small caps are volatile, I should know, I trade small cap biotech shares and see volatility every week, like this puppy which is my biggest biotech holding and getting clobbered in the last three days (I bought more):
My thinking is small-caps are volatile but this is where to focus going into the September Fed meeting where they will cut rates for sure (I see employment weakening more).
Once the Fed starts cutting, the party is over for all stocks, including small caps (defensive stocks will fare better).
I know Trahan wrote about small-caps this week and he's not convinced the rally has legs but admits it can go on for a bit longer.
I don't have time to read everyone any longer, need to look at charts and focus.
It's worth noting that gold and oil sold off today as Risk Off dominated and the US dollar rallied.
I wouldn't read too much into this week, like I said, my focus is on small caps, especially small cap biotechs with FDA approved drugs that short sellers gunned for in recent weeks (APLS and MDGL which is are more large cap, IOVA, BCRX, DAWN, IBRX, TGTX and many more).
But this is the chart I will be watching early next week:
If small-caps rebound and go higher, it can be an explosive rally.
Below, Rebecca Patterson, former Bridgewater chief strategist, joins 'Power Lunch' to discuss markets and the small-cap rally. She's been skeptical on small-caps over the last few years and wants to see how much easing is actually coming. She's neutral on Big Tech and thinks a lot of good news is priced in. Take the time to listen to her comments.
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