Big Time Selloff In The Big Internet Names
Nasdaq was down 2.29% on Thursday. It might end its streak of avoiding back to back losses on Friday, tying it with the record. July has been a bad month for the tech sector. Momentum names have hit a wall and the big internet stocks have lagged. This is because the sector got overheated and investors are pricing in the possibility of an economic improvement after this slowdown.
It’s hard to not see an improvement in the next 6 months. More people than ever are wearing masks. New cases per day have already peaked. Another stimulus is coming and the Fed is as stimulative as ever. Everything is headed in the economy’s favor.
As you can see from the chart below, the FANG stocks have been down 6 of the past 9 days. That’s a 7% decline in the past 9 days which is the worst performance since March. The coming decline will be somewhere between a correction and the March volatility.
We need to see a sentiment shift that turns retail traders negative on these names. Remember that after the 2009 bottom, there were stories in the media about how retail traders would never get back in the market. We need to see that for a true bottom.
Tesla stock fell 5% after its earnings report came out the prior day. In near perfect reverse synchronicity, Hershey stock rose 5.7% on its earnings report. People bought chocolate chips and other baking products to cook from home which offset the decline in sales near the payment area of retailers and at movie theaters.
A big worry is over Halloween. Great thing is consumers don’t need to trick or treat to eat the candy. This rally in Hershey and decline in Tesla is perfectly emblematic of the market in July.
CLOU ETF fell 2.14%. Amazon was down 3.66%; it may have made a double top on July 10th and the 20th. Amazon is reporting earnings next Thursday. Online sales growth was probably strong, but to me that’s irrelevant. Some only care about AWS sales growth.
With Azure decelerating and AWS usually showing lower growth partially because it’s bigger, AWS is in line for fairly low growth. Last quarter had 33% growth. That’s a great figure, but it’s not enough to keep the stock at a historically stretched valuation. It’s almost common sense that a stock that has gone parabolic is very expensive.
Sentiment Check: Greed
CNN fear and greed index was up 3 points to 68 which is greed. It’s almost at extreme greed. This is the highest reading since the bear market in March. As you can see from the table below, the NAAIM index indicates investment managers have gone ‘all in’ on this market.
We know they weren’t going all in on value stocks or regional banks. They are all in on the big tech stocks of course. By the way, the KBW regional bank index was up 2.57% on Thursday. Rates might be headed higher over the next few months.
NAAIM index rose from 90.53 to 97.88 which is the highest reading since December 18th, 2019. It took a couple months for stocks to fall after that peak obviously. This time is different because there are so many reasons for stocks to fall. There is euphoria in tech stocks, there’s an election in a few months, the Chinese trade war is getting worse, and obviously there is the COVID-19 pandemic.
If you told anyone 1 year ago that there would be a global pandemic and simultaneously there was extreme optimism in the NAAIM index, they wouldn’t have believed you. It’s quite a ridiculous scenario we find ourselves in.
AAII investor sentiment survey has confounded many because retail investors are so bullish, yet this has been bearish. It differs from retail traders because this doesn’t measure the Robinhood traders. That would make sense because Robinhood traders are new ones who aren’t answering surveys. This week, there were 1.5% more bears. And there were 46.8% bears which is above the long term average of 30.5%.
Percentage of bulls fell 4.8% to 26.1% which is below the long term average of 38%. There have been more bears than bulls for 22 straight weeks which is the longest stretch since late 1990 which is the record. Given the recent results, we can strongly expect this streak to go a few more weeks. There are so many more bears than bulls, there’s almost no way that many become bulls in a week or two.
The chart below is in tune with the speculation we have seen amongst retail investors. New investors who can’t afford to buy whole shares are buying fractional shares. To be clear, the popularity is up because the technology wasn’t as prevalent a few years ago. That being said, the tech did exist in 2019, yet activity is up.
Intel Crashes After Earnings
Intel stock cratered 10.6% after hours because in its earnings presentation it said its 7 nm manufacturing process suffered a 6 month delay. First consumer products won’t come out until late 2022. Intel will be pivoting to using 3rd party fabs.
This weakness is about execution rather than the macro picture, so there’s not much to glean from this if you aren’t an Intel shareholder. The stock will heavily weigh on the Nasdaq on Friday which could cause it to end its record tying streak without a 2 day losing streak.
Conclusion
Big internet stocks have had a weak July. That’s to be expected as they were very overheated heading into the month. Some are saying Tesla’s decline on Thursday signals the top is in because it declined on good news.
We don’t know if it has topped, but many would disagree that the report was good. Profitability was based only on tax credits. You can argue that this reliance shouldn’t allow it to be in the S&P 500. Either way, it is one of the most overvalued stocks in the market today and should be avoided.