The Magnificent Rotation Getting Underway?

By

Alex Harring and Hakyung Kim of CNBC report the Nasdaq Composite slips Friday, falls two weeks straight for the first time in 2023:

The Nasdaq Composite ended Friday lower and notched its second consecutive losing week in 2023 as semiconductor stocks languished.

The tech-heavy Nasdaq slid about 0.6% to end at 13,644.85, pulled down by a selloff in semiconductor stocks such as Advanced Micro Devices, Nvidia and Micron. The VanEck Semiconductor ETF (SMH) ended the week down 5.2%, its worst week since October 2022.

The S&P 500 inched lower by 0.1%, ending at 4,464.05. The Dow Jones Industrial Average added 105.25 points, or 0.3%, closing at 35,281.40. The 30-stock index was helped by advances of 2.1% and 1.8% in Chevron and Merck & Co., respectively.

The S&P 500 and the Nasdaq declined about 0.3% and 1.9%, respectively, on the week. Both registered their second straight losing week — a first of that length for the technology-heavy Nasdaq since the conclusion of a four-week losing streak in December 2022.

The Dow is an outlier of the three major averages, advancing 0.6% this week.

Investors had much to celebrate earlier in the week.

July’s consumer price index, a major inflation reading for markets and the Federal Reserve, came in softer than anticipated on a year-over-year basis. Prices climbed 3.2% on an annual basis, less than the Dow Jones consensus estimate of 3.3%.

To be sure, the CPI reading showed some signs of stickiness. So-called core CPI, which excludes volatile food and energy costs, rose 4.7% from the prior year.

Elsewhere, Disney rallied on the back of its earnings report released Wednesday. Despite a pullback in Friday’s session, shares were 3.2% higher on the week. That marks the biggest weekly gain for the entertainment giant since March.

But inflation data released Friday complicated the picture. July’s producer price index, which tracks the price wholesalers pay for raw goods, rose 0.3% from the previous month. Economists polled by Dow Jones expected a 0.2% increase month over month.

This week’s moves are the latest in what’s been a rocky patch for the stock market after a strong performance in the first half of the year. The three major indexes are all lower than where they began August.

“Investors continue to try to hang their hat on more consistency” within economic data, said Greg Bassuk, CEO of AXS Investments. “What we’re seeing with these mixed results certainly increases the likelihood of more volatility ahead.”

I can show you where all the stock market action was this week:

It's funny, in late May, I wrote a comment on how the absolutely insane (AI) market is reaching new levels of delusion, but it held up nicely until recently.

Now you're seeing portfolio managers appear on CNBC saying they're "trimming their holdings on Nvidia" (code for getting the hell out of it) and other stocks that ran up to the moon on the artificial intelligence craze.

Some intelligent observers are wondering if Nvidia will suffer the same fate as Cisco going forward as the AI craze evaporates:

Whatever the case, the market is rebalancing and nobody is immune from the latest selloff:


As you can see above, Apple and Microsoft shares have declined below their 50-day moving average, as have Tesla shares, and while Amazon, Google and Meta shares remain above their 50-day moving average, they're wobbly and toppish here.

Collectively with Nividia, these stocks make up the so-called "Magnificent Seven" shares which have powered the Nasdaq up 37% this year.

But as we end the third quarter in a little over a month and head into the final stretch, this outperformance of mega tech stocks seems to be stalling here and risks throwing the entire market into a tailspin if the selloff becomes more brutal:

We shall see if the Dow can decouple from the Nasdaq and carry this market going into the stretch.

Stocks remain expensive, however, profit margins are expanding which is positive:

Still, smart CIOs are warning that a credit crisis is the next shoe to drop here:

I don't know. High yield bonds have held up nicely lately but as the economy falters, risks abound:

There is something else worth keeping in mind here.

As US house prices soar and rents become more expensive, how long before workers demand higher wages and get it?

Color me a skeptic but I think this market is way too complacent on long-term inflation risks.

We have yet to see a wage inflation spiral and many think it's impossible but I remain very cautious and see balanced risks on inflation going forward.

We shall see what Fed officials have to say in a couple of weeks at the Jackson Hole summit (August 24-26).

All I know is long-term bond yields backed up again this week and a nice opportunity to buy long bonds might present itself in the run-up to Jackson Hole:

But as long as long bond yields keep climbing, the market will sell off and it's the hyper growth stocks and meme stocks which will be bear the brunt of the selloff:

That much I'm convinced of, just as I'm convinced we are headed into a protracted and deep recession unlike anything we have seen in decades.

I find it absurd and quite worrisome that some market participants think a soft landing is possible.

On that note, here are the large cap winners and losers this week (data available here):

Below, CNBC's 'Halftime Report' Investment Committee, Shannon Saccocia, Kari Firestone, Steve Weiss and Bill Baruch, discuss the market winners and losers, and recession likelihood. Services inflation is still being very stubborn, says Short Hills Capital's Steve Weiss.

Second, Bob Elliott, Unlimited CEO & CIO, joins 'Closing Bell Overtime' to talk market conditions, which sectors are seeing strength and more.

Lastly, Guggenheim Partners Investment Management CIO Anne Walsh says investors are trying to fight the Fed and warns that not worrying about the potential for a recession is a mistake during an interview with Alix Steel and Guy Johnson on "Bloomberg Markets."

Comments

Post a Comment