Technology And Energy Shares Lead Broad-Based Selloff

Table of Contents

Key Takeaways:

  • Tech gets hammered again as regulatory news hurts sector
  • Rotation from tech into other sectors appears to be losing steam

The air keeps coming out of the tires.

A market that rode hard all summer on the FAANGs and semiconductors is making a loud hissing noise as those high-flyers lose traction.

All summer, investors heard warnings that if Tech’s party settled down, the broader market would take a hit. September reminds us of that as it appears on track to be the first losing month since March and the worst month of September in 18 years.

All the FAANGs played serious defense Wednesday in the second of three sessions this week where Tech spent most of the day dragging everything else down. The Tech weakness was joined by a rout in the Energy sector, where companies staggered amid worries about shutdowns in Europe and other places dragging on demand.

One possible source of pressure on Tech came from the Justice Department planning to submit a proposal to Congress to curb long standing legal protections for internet companies and force them to shoulder more responsibility for managing content on their sites, The Wall Street Journal reported.

The congressional action—combined with natural hesitation to keep buying after the run Tech has had—helped trigger selling, and the selling fed on itself as Tech stocks continued to race lower throughout the day. Apple
(AAPL), Amazon
(AMZN), and Microsoft
(MSFT) were poster children for the damage. When you see a mega-cap like MSFT fall 3.5% in a session, it tells you a lot of things combined to hurt the sector.

As Tech Falls Out of Favor, No One Comes to Take Its Place

Often in the recent past when Tech was down, investors found other parts of the market to rotate into. It seemed like today there just wasn’t much interest in doing that. The Financials had a tough day, turning completely around after a strong open. The Cboe Volatility Index (VIX) flirted with 30 as market fears climbed the ladder. There just weren’t a lot of bright spots in the market.

Technically, it feels like the S&P 500 Index (SPX) might be in the process of testing support levels between 3212 and 3259, but it may ultimately challenge its 200-day moving average down around 3100 before getting back on firmer footing, wrote CFRA analyst Sam Stovall in a note today.

Maybe there’s some comfort in the fact that the SPX did manage to close above the lows for its recent downturn, but it didn’t miss those by much. It remains just above an official 10% correction from its recent all-time highs.

At the same time, the Nasdaq
(COMP) showed no sign of a late comeback like investors saw last week and Monday. Those rebounds in the last hour of the day had brought hope going into the next session. That’s not the case going into Thursday, when investors will probably focus immediately on weekly initial unemployment claims due just before the open. Wall Street consensus is for a reading of 825,000, reported, down from 860,000 a week earlier. If there’s a positive surprise in the data, that could conceivably help arrest the slide.

Another thing that would help but doesn’t seem very likely is action from Congress on a fiscal stimulus. Some of this week’s heaviness in the market could be connected to the fact that Washington, D.C., remains “conflict central,” and of course, coronavirus concerns.

Crude Steps Back, but Dollar Steps Up

Meanwhile, crude’s brief rally back above $40 a barrel last week is fading into memory as U.S. prices fell back toward $39. A spate of supply worries last week didn’t seem to last, and the virus-related shutdowns in England and other parts of the world have people concerned about falling gasoline and jet fuel usage.

If investors are pulling money out of Tech and not rolling it into any other sector, where is it going? Not necessarily into bonds, which have been steady all week, or into gold, which has been losing ground.

So could it be the dollar? Maybe. The dollar index rose above 94 on Wednesday and has generally been moving up all week. Sometimes a stronger dollar is a good thing because it reflects confidence in the U.S. economy. Other times, like when things fell out of bed last March and the dollar rose above 100, it wasn’t so good because it indicated to some analysts that people felt most comfortable moving investments to cash. This is typically a sign of fear.

Bumps and Bruises Persist

Anyone hoping things might smooth out a little in the coming days might be in for disappointment. Wednesday’s quick shift from bright sun at the open to dark clouds an hour later was only the latest evidence that this market can shift on a dime. For some of the unsteadiness, feel free to blame the virus, which has made things so unpredictable almost all year.

As long as cases keep growing, there’s no reason to think this won’t keep being a choppy market. Coronavirus overshadows everything right now. There’s no end date for that, and no one knows when we’ll get a resolution to that. One medical expert quoted in the media compared virus outbreaks to the forest fires out West. New ones keep cropping up even while old ones get put out, and no one is sure where the next one will start.

If you’re a long-term investor, this whole year has been another reminder of why it might be best not to focus on all the noise and stop worrying so much about day-to-day moves. Doing that can make you more prone to make trades out of fear. Eventually, we’ll hopefully be on the other side of this. In the meantime, investors should consider sticking with their plans.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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