The Upside to Last Week's Tech Slide

Large-cap Technology stocks sank last week. This was not entirely unexpected at FS Insight, in part due to the sizeable gains we've seen in Tech in the past few months. Those gains are seen in the Nasdaq 100, which remains up 15% YTD even after last week's declines. Head of Technical Strategy Mark Newton commented that “some consolidation in Technology was expected compared to the broader market”, and reminded us that the declines we've seen in the SPX and QQQ since mid-July are largely due to “the extent to which many large-cap Technology stocks dominate these indices.” Asked whether these portend a larger correction in store, Newton said, “Fortunately, I think the answer is ‘no’. [...] Despite last week, we really have not seen any true evidence of technical deterioration. I think it’s important to note that markets remain within uptrends.”

We are still constructive on the S&P 500 overall,” agreed Fundstrat Head of Research Tom Lee, viewing much of this week’s selloff as “overdone.” Yet for Lee, the interesting aspect of the large-cap selloff has been its effect on small-caps. “Previously, we had confidence that a sizable rally for small-caps would ensue, but we had initially thought this would be funded by the $6 trillion of cash on the sidelines,” Lee told us. Instead, it is the rotation out of large-caps that seems to be fueling the rise of small-caps (IWM -0.75% ), which rose about 3% last week. “We see [small-caps] as the most compelling near-term opportunity,” Lee said. He and his team saw an important signal this week that has historically been followed by gains in small-caps, which we discuss alongside our Chart of the Week below.

Notably, Newton’s technical view on small-caps coincides with Lee’s. “When we look at IWM -0.75%  versus the S&P 500, we have seen a very meaningful breakout of a trend going back over the last three years. That’s happened very quickly over the last three weeks, a very powerful move. For me right now, it still looks right to favor the Russell 2000 and think that that can show some outperformance.”

Politics

As most are aware, it has been an interesting two weeks in Presidential politics. FS Insight does not have a view or preference on the potential outcome of the election, but historically, the outcome of Presidential elections have generally not impacted the markets in the intermediate term. As Newton noted, “I don't give election-year politics that much importance as to what drives stocks.” Regardless of the result, after elections “when the uncertainty is eliminated, markets typically do better,” he said. However, the uncertainty before the election leads him to suggest that investors could face challenges from September into November.

For those interested, however, Washington Policy Strategist Tom Block has told us on numerous occasions that political strategists typically view Presidential-election polling numbers before Labor Day as unreliable.  

The Upside to Last Week's Tech Slide
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