London Capital Group: Nasdaq sell-off and a tech rotation. In our view, calls for a long-lasting switch from tech to financials are premature. The idea that tech could be in for a bigger correction.. By Jasper Lawler, Head of Research

 

Nasdaq sell-off and a tech rotation

By Jasper Lawler, Head of Research

LCG – London Capital Group

Technology has been the most consensus, as well as the one of the best-performing trades of 2017. That combination is making investors nervous going into year-end and they are taking profits. After briefly reaching a 3-day high on Monday, the tech-heavy Nasdaq 100 slammed back down to finish -1.17% and near its lows. FAANG stocks were not the worst hit, though Facebook fell -2.07%, Apple only dropped -0.73%. The Dow also finished lower on Monday, but a strong showing for financial firms helped it close well off Friday’s lows. The passing of House and Senate tax plans have boosted demand for bank stocks at the expense of tech.

In more normal market conditions, the best-performing trade over the last 12-18 months will not be the top performer over the next 12-18 months because eventually smart money moves into a trade with lower valuations. But these are not normal market conditions. In this ultra-low volatility environment, momentum is a strong force to overcome. Tech has momentum and earnings growth behind it.

After a swoon in tech stocks in June, there were similar calls for a more long-lasting shift out of tech and into energy as oil prices recovered. The Nasdaq 100 has gained over 14% off its July lows when those calls were made. This time the sector chosen to replace tech is financials because of US tax reform. Most economists think the Republican tax plan will have little impact on short-term economic growth, so lending is unlikely to pick up substantially to support the earnings of financials.

In our view, calls for a long-lasting switch from tech to financials are premature. The idea that tech could be in for a bigger correction does have more merit with year-end repositioning so in the short-term, a clear break below 6250 in the Nasdaq 100 could see the index fall to 6100 then 6000.

The Nasdaq 100 is expected to open -11 points to 6252 on Tuesday.

Twitter: @jasperlawler

Email: jasper.lawler@lcg.com

The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. Losses can exceed deposits.