The Ex-Mag7+ Santa Claus Rally?
U.S. equities pulled back on Friday as investors continued to exit technology stocks and move into value areas of the market.
The S&P 500 fell 1.07% to end the day at 6,827.41, and the Nasdaq Composite declined 1.69% to 23,195.17. The Dow Jones Industrial Average finished down 245.96 points, or 0.51%, to settle at 48,458.05 after scoring a new intraday all-time high earlier in the session. The Russell 2000 index slid 1.51% to 2,551.46 but had also hit a fresh all-time high during the trading day.
The broad market index and tech-heavy Nasdaq were bogged down by a more than 11% drop in Broadcom, which some analysts think is because of margin compression worries. That’s even after the company beat fourth-quarter expectations and gave a strong forecast for the current quarter, saying artificial intelligence chip sales look to double.
As the AI trade faced more pressure, with names like AMD, Palantir Technologies and Micron seeing some losses alongside Broadcom, stocks in other areas of the market such as financials, health care and industrials received a bit of a boost. In those sectors, Visa and Mastercard as well as UnitedHealth Group and GE Aerospace were winners.
“Today is a value-outperforms-growth day,” said Jed Ellerbroek, portfolio manager at Argent Capital Management. “Investors are definitely skittish as it relates to AI — not outright pessimistic, but just kind of, I think, cautious and nervous and hesitant.”
Friday’s action marked another day of the rotation trade, as investors on Thursday poured into cyclical stocks that are considered more sensitive to the economy while taking profits in growth-oriented names tied to the AI trade. The move comes after the Federal Reserve on Wednesday cut interest rates for the third time this year.
A rise in shares of Visa and UnitedHealth, along with others such as Nike, propelled the Dow to close at a record in the prior session. The S&P 500 notched a new closing high as well, while the Nasdaq ended the day lower as high-flying tech stocks such as Alphabet and Nvidia dropped.
“The same things don’t outperform in markets month after month after month for forever, so this is normal,” Ellerbroek also said. “It’s to be expected, but it is unwarranted.”
With the day’s losses, the S&P 500 and Nasdaq scored a losing week, with the former down 0.6% and the latter losing 1.6%. The 30-stock Dow posted gains, however, up 1.1% on the week. Small-capitalization companies have outperformed their larger counterparts, meanwhile, with the Russell 2000 up 1.2% this week after notching fresh all-time and closing highs on Thursday.
It wasn't a good week for megacap tech shares as shares of Oracle (ORCL) and Broadcom (AVGO) sold off after earnings, the former more than the latter.
In fact, Oracle's stock is down 16% this month while Broadcom's is up 1% in December despite getting whacked 11% today.
More broadly, megacap tech darlings are struggling lately as are other AI related stocks but the market has done well, setting a record.
How can this be? Well, if you look at year-to-date performance, Communication Services and Technology shares have outperformed all other sectors:
But over the past month, a different picture emerges:
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As you can see, the megacap tech rally broadened out to reach Financials, Industrials, Healthcare and Staples.
I must admit, I was expecting more FOMO and concentration risk going into the stretch so I'm pleasantly surprised this market has broadened and other sectors are doing the heavy lifting.
Have a look at the stocks making new highs today, it's definitely not tech shares powering the S&P 500 higher.
That's why I called this comment the Ex-Mag7+ Santa Claus Rally, it isn't the usual suspects driving the market higher, it's quality, blue chip value stocks into the final stretch of the year.
Will this continue over the next two weeks and into the new year? A lot of big institutions are underweight Mag-7 so it's possible but in these markets, things can change fast from one month to another, or from one week to another!
But clearly there's no FOMO trade chasing Mag-7+ stocks higher, that never materialized.
All I can say is you need to look at all stocks on a stock by stock basis and assess downside risk.
For example, Oracle sold off this week after a disappointing earnings report. When I look at the weekly 5-year chart, I ask myself, can it go back below its exponential 200-week moving average of $148 if the AI trade really blows up?:
Sure it can, highly unlikely but I'm not ruling it out completely.
It can also stabilize around these levels ($185-$200) and head back over its 10-week exponential moving average of $227 and resume an uptrend (not likely in short run).
Where am I going with all this? Don't get flustered when high beta stocks sell off, know your levels, position accordingly, and add when momentum is going your way.
On Broadcom, despite today's 11% smackdown, the chart remains extremely bullish, for now:
Alright, let me end it there and wish everyone a nice weekend.
Below, Ed Yardeni, Yardeni Research president, joins 'Squawk Box' to discuss the latest market trends, why he's moving away from being overweight on Magnificent 7 stocks, sectors he's in favor of, the Fed's interest rate outlook, and more.
Also, Jeremy Siegel, Wharton professor emeritus and WisdomTree chief economist, joins 'Closing Bell' to discuss what's been happening in equity markets around AI stocks.
Third, Aswath Damodaran, NYU professor, joins 'Closing Bell' to discuss the professor's thoughts on megacap tech stocks, if the markets are bifurcated and much more.
Fourth, The 'Fast Money' traders talk about a report stating Oracle is delaying data centers.
Lastly, Craig Johnson, Piper Sandler chief market technician, and Matt Orton, Raymon James chief market strategist, joins 'Power Lunch' to discuss the recent market rotation, how sustainable the market rotation is and much more.
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