During the week of July 22-26, 2024, the stock market witnessed a significant shift as money moved out of big tech stocks. Several key factors contributed to this movement, including disappointing earnings reports, geopolitical concerns, market rotation, technical patterns, and broader market dynamics. This blog post delves into these factors, explores the implications of the Great Rotation for tech stocks and the broader market, and discusses predictions from Goldman Sachs strategists about potential market pullbacks.

Disappointing Earnings Reports

Tesla’s Profit Drop

One of the primary drivers behind the outflow of money from big tech stocks was the disappointing earnings reports from major tech companies. Tesla, a key player in the tech sector, reported a 45% drop in profit, which fell significantly short of market expectations. This sharp decline in profit led to a substantial decrease in Tesla’s stock price, creating ripples throughout the tech sector.

Alphabet’s YouTube Advertising Revenue

Similarly, Alphabet, the parent company of Google, reported weaker-than-anticipated YouTube advertising revenue. The underperformance in this critical revenue stream resulted in a notable decline in Alphabet’s stock price. As a result, the broader tech sector experienced a downturn, contributing to the bearish sentiment.

Geopolitical Concerns

Chip-Related Trade Restrictions with China

Geopolitical concerns also played a significant role in the movement away from big tech stocks. There were increasing worries about potential restrictions on chip-related trade with China. Semiconductor stocks, which are heavily reliant on global trade, were particularly affected by these uncertainties. The fear of further geopolitical tensions contributed to the negative sentiment in the tech sector.

Market Rotation

Shift to Smaller-Cap and Cyclical Stocks

Investors began shifting their focus from large-cap tech stocks to smaller-cap stocks and more cyclical sectors. This rotation was driven by the perception that large tech stocks were overvalued and the expectation that smaller companies would benefit more from potential Federal Reserve rate cuts. The movement towards smaller-cap and value stocks indicated a broader market participation and reduced market concentration risk.

Technical Patterns and Sentiment

Market Pullback and Correction

The market experienced a technical pullback after a period of bullish sentiment. Both the S&P 500 and Nasdaq saw their worst daily declines since 2022, signaling a correction in an overvalued market. This technical pattern further exacerbated the outflow of money from big tech stocks.

Broader Market Dynamics

Cautious Investor Sentiment

Despite some positive corporate earnings and economic data, the overall sentiment in the market remained cautious. Investors were seeking more evidence of progress from tech companies, particularly in areas like artificial intelligence, before regaining confidence in the sector. This cautious approach contributed to the challenging environment for big tech stocks during that week.

The Great Rotation: Implications for Tech Stocks and the Broader Market

Shift in Market Leadership

The Great Rotation is characterized by a move away from large-cap tech stocks towards smaller-cap stocks and more cyclical sectors. This shift suggests that the dominance of Big Tech companies in driving market gains may be waning. As investors diversify their portfolios, the leadership in the market is transitioning to other sectors.

QQQ Technical Analysis

The chart depicts the Nasdaq QQQ Invesco ETF (QQQ) as of July 26, 2024. The chart includes several technical indicators: Moving Averages (50-day and 200-day), Volume, Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI), On-Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV), Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More, Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More, and MACDThe MACD indicator is essentially a momentum indicator that shows the relationship between two different moving averages of price. The MACD is the difference between the 12-period ... More Oscillator.

Trend Identification:
The price of QQQ-BZ is currently above the 200-day moving average (429.63), suggesting a longer-term uptrend. However, it is below the 50-day moving average (475.87), indicating a potential short-term downtrend. The recent candles show a slight recovery after a pullback, but overall, there’s cautious movement.

Support and Resistance Levels:

• Support: Around the 200-day moving average at 429.63.
• Resistance: Around the 50-day moving average at 475.87.

Key Indicators Analysis:

Volume: There is a moderate volume with no significant spikes, indicating typical trading activity.
RSI (14, MA): Currently at 38.20, which is in the lower range, indicating the stock is nearing oversold territory.

On-Balance Volume (OBV): Displays a downtrend, suggesting that more volume is occurring on down days, which could be bearish.

Stochastic RSI: At 0.099, it shows that the ETF is highly oversold.

Chaikin Oscillator: Negative at -56.88M, suggesting weak accumulation/distribution.

MACD: The MACD line (-3.32) is below the signal line (-7.35) with negative histogram bars, indicating a bearish trend.

Time-Frame Signals:

• 3 Months: Hold. The ETF is showing signs of recovery but needs to break above the 50-day moving average to confirm a bullish short-term trend.
• 6 Months: Buy. Given the longer-term uptrend indicated by the 200-day moving average, there could be a rebound after the current consolidation phase.
• 12 Months: Buy. The overall long-term trend remains positive, and once the short-term corrections are overcome, the ETF is likely to appreciate.

Past performance is not an indication of future results, and this article should not be considered as investment advice. Always conduct your own research and consider consulting with a financial advisor before making any investment decisions. 🧡

Valuation Adjustments

The rotation is partly driven by the perception that large tech stocks were overvalued. As investors move funds out of these stocks, it could lead to a correction in their valuations. This adjustment in valuations may have a significant impact on major market indices that are heavily weighted towards tech stocks.

Broader Market Participation

The shift towards small-cap and value stocks could lead to a more balanced market rally, with gains spread across a wider range of sectors and companies. This broader participation could potentially reduce market concentration risk and create a healthier market environment.

Economic Sensitivity

Small-cap stocks are generally more sensitive to economic conditions. Their outperformance suggests growing investor optimism about the broader economy, possibly linked to expectations of Federal Reserve rate cuts. If these cuts materialize, it could further benefit small-caps and cyclical stocks, potentially extending the rotation.

IWM Technical Analysis

Time-Frame Signals

The Russell 2000 Ishares ETF (IWM) chart displays a notable upward trend since late June, marked by a strong move above previous resistance around the 210 level. The price is currently around 224.22, indicating a recent surge in momentum.

Trend Identification
The chart exhibits an upward trend with higher highs and higher lows since the dip in May. The 50-day moving average is trending upwards and has recently crossed above the 200-day moving average, which is a bullish signal often referred to as a “Golden CrossWhen the 50 day moving average crosses above the 200 day moving average, it is called a Resurrection Cross. Conversely, when the 50 day moving average crosses below the 200 day mov... More.”

Support and Resistance Levels
Key support levels to watch are around the 210 level and the 50-day moving average at 208.43. The 200-day moving average at 197.46 serves as a significant longer-term support. Resistance is observed around the recent high of 225.39.

Volume Analysis
The volume shows a recent increase, supporting the upward price movement, which is a positive sign indicating strong buying interest.

Relative Strength Index (RSI)
The RSI is at 66.88, which is close to the overbought threshold of 70. This suggests the stock may be nearing overbought conditions but still has room to grow.

On-Balance Volume (OBV)
The OBV line is trending upwards, indicating accumulation and strong buying pressure.

Stochastic RSI
The Stochastic RSI is at 0.589, suggesting a potential pause or minor pullback in the uptrend, but not indicating a significant reversal at this time.

Chaikin Oscillator
The Chaikin Oscillator shows positive values, indicating buying pressure, though it has slightly decreased, which could suggest a short-term consolidation.

MACD Oscillator
The MACD line is above the signal line with increasing histogram bars, indicating strong bullish momentum.

Time-Frame Signals

• 3 Months: Buy. The upward momentum, along with strong volume and bullish moving average crossovers, suggests continued gains in the short term.
• 6 Months: Hold. While the trend is positive, approaching overbought RSI levels and potential for short-term consolidation warrant a cautious stance.
• 12 Months: Buy. The overall bullish trend and positive technical indicators suggest long-term growth potential.

Past performance is not an indication of future results. This article should not be considered as investment advice. Always conduct your own research and consider consulting with a financial advisor before making any investment decisions. 🧡

Interest Rate Impact

The rotation is partly driven by expectations of Federal Reserve rate cuts. If these rate cuts come to fruition, they could provide additional support to small-caps and cyclical stocks, thereby reinforcing the rotation and altering the market dynamics.

Sector Performance Divergence

As the rotation continues, there may be increased divergence in sector performance. Traditional value sectors like financials and real estate could outperform, while tech may lag behind. This divergence in sector performance highlights the shifting investment landscape.

Market Volatility

The transition from tech leadership to a broader market rally may not be smooth. As observed in recent trading, this shift can lead to increased market volatility. Investors must be prepared for potential fluctuations as the market adjusts to the new dynamics.

Earnings Expectations

The sustainability of the rotation will partly depend on whether small-cap and value stocks can deliver on earnings expectations. If these stocks fail to meet expectations, it could lead to a reversal back to tech leadership. Monitoring corporate earnings will be crucial in assessing the longevity of the rotation.

Political and Policy Factors

The upcoming U.S. elections and potential policy changes could influence the rotation. Protectionist policies or regulations targeting Big Tech could further support the move away from tech stocks. Political developments will play a significant role in shaping the market’s future direction.

Global Market Implications

As U.S. markets often lead global trends, the Great Rotation could potentially influence investment patterns in other major markets. This shift may affect global equity allocations, prompting investors to reassess their strategies.

Goldman Sachs’ Prediction of a Market Pullback

Seasonal Weakness

Goldman Sachs tactical strategist Scott Rubner highlights that historically, late July and August tend to see substantial outflows from passive equity and mutual funds, contributing to market weakness. This seasonal pattern suggests that the market may experience a pullback during this period.

Stretched Positioning

The market is currently seen as having overextended positioning, with much of the positive news already priced in. This stretched positioning increases the likelihood of a market correction as investors reassess their holdings.

Slowing Economic Growth

Concerns about softer growth indicators on the horizon are adding to the bearish sentiment. Slowing economic growth could negatively impact market performance, leading to a potential pullback.

Political Uncertainties

Rising policy uncertainties surrounding the upcoming U.S. elections are contributing to the cautious sentiment in the market. Political uncertainties often lead to increased market volatility and can trigger pullbacks.

Technical Factors

The recent significant declines in the S&P 500 and Nasdaq indicate a potential correction in an overvalued market. Technical factors are pointing towards a market pullback in the near term.

Shift in Investor Focus

There is a noticeable rotation from large-cap tech stocks to smaller-cap and more cyclical sectors. This shift in focus could lead to increased volatility as investors adjust their portfolios.

Central Bank Policies

Expectations of a more accommodative stance from central banks might signal economic concerns. If central banks adopt more supportive policies, it could impact market dynamics and influence investor sentiment.

Short-Term Outlook

While Goldman Sachs maintains a positive outlook for equities over the longer term, they have adjusted their short-term stance to neutral across various assets for the next three months. The firm’s strategists, including Christian Mueller-Glissmann, head of asset allocation research, warn of a potential setback or correction in the coming months.

Avoiding a Bear Market

It is important to note that while Goldman Sachs predicts a pullback, they do not foresee this developing into a bear market. Historically, significant equity downturns coincide with recessionary periods, and current indicators do not suggest an imminent recession.

Insights

1. Alphabet and Tesla’s earnings miss led to broad tech sector declines.
2. Geopolitical tensions with China affected semiconductor stocks.
3. Investors rotated from large-cap tech to smaller-cap and cyclical stocks.
4. Market technical patterns indicated a correction in an overvalued market.
5. Caution prevailed despite some positive corporate and economic data.

The Essence (80/20)

1. Core Topics:
   • Earnings Reports: Major tech companies reported disappointing earnings.
   • Geopolitical Concerns: Trade restrictions with China affected semiconductor stocks.
   • Market Rotation: Shift from large-cap tech to smaller-cap and cyclical sectors.
   • Technical Patterns: Market correction following bullish sentiment.
   • Broader Market Dynamics: Cautious sentiment despite positive data.

The Guerilla Stock Trading Action Plan

1. Monitor Earnings: Keep a close watch on upcoming earnings reports from major tech companies.
2. Geopolitical Developments: Stay informed on trade policies and geopolitical issues, particularly with China.
3. Investment Strategy: Consider diversifying investments to include smaller-cap and cyclical stocks.
4. Technical Analysis: Regularly review technical market indicators for potential corrections.
5. Sector Analysis: Evaluate sector performance and adjust portfolios to mitigate concentration risk.

Blind Spots

AI Progress: Investors’ expectations for advancements in AI could be a key factor in regaining confidence in the tech sector. This aspect might not be fully factored into current market assessments.

Interest Rate Expectations: The potential impact of Federal Reserve rate cuts on the broader economy and different market sectors may be underestimated. While the rotation into smaller-cap and cyclical stocks is partly driven by these expectations, the actual effects of rate cuts on various economic factors and stock performance might not be fully considered.

Global Economic Trends: The influence of global economic conditions and trends on U.S. tech stocks might be overlooked. Economic slowdowns or growth in other major economies could significantly impact multinational tech companies, affecting their earnings and stock performance in ways that are not currently accounted for in market predictions.

Looking Ahead

The Great Rotation in the stock market during the week of July 22-26, 2024, has significant implications for tech stocks and the broader market. Disappointing earnings reports, geopolitical concerns, market rotation, technical patterns, and broader market dynamics have contributed to the movement away from big tech stocks. The shift in market leadership, valuation adjustments, broader market participation, economic sensitivity, interest rate impact, sector performance divergence, market volatility, earnings expectations, political and policy factors, and global market implications all play a role in shaping the future of the market.

Goldman Sachs’ prediction of a market pullback highlights the potential for short-term volatility, but the long-term outlook for equities remains positive. Investors must stay vigilant and closely monitor economic data, policy decisions, and corporate earnings to navigate this evolving market landscape effectively.

Frequently Asked Questions on Recent Market Movements

FAQs

Q1: Why did money move out of big tech stocks during the week of July 22-26, 2024?

A1: Several key factors contributed, including disappointing earnings reports from major tech companies like Alphabet and Tesla, geopolitical concerns about potential trade restrictions with China, market rotation to smaller-cap and cyclical stocks, technical pullbacks, and broader market dynamics with cautious investor sentiment.

Q2: What were the earnings reports that affected big tech stocks?

A2: Alphabet and Tesla reported earnings that fell short of market expectations, with Tesla’s profit dropping by 45% and Alphabet’s YouTube advertising revenue being weaker than anticipated.

Q3: How did geopolitical concerns impact the tech sector?

A3: There were worries about potential restrictions on chip-related trade with China, negatively impacting semiconductor stocks and contributing to bearish sentiment in the tech sector.

Q4: What is market rotation and how did it affect tech stocks?

A4: Market rotation involves investors shifting focus from large-cap tech stocks to smaller-cap stocks and more cyclical sectors, driven by perceptions of overvaluation in large tech stocks and expectations of benefits from potential Federal Reserve rate cuts for smaller companies.

Q5: What technical patterns influenced the market during this period?

A5: The market experienced a technical pullback after a period of bullish sentiment, with the S&P 500 and Nasdaq seeing their worst daily declines since 2022, indicating a correction in an overvalued market.

Q6: What broader market dynamics contributed to the movement out of tech stocks?

A6: Despite positive corporate earnings and economic data, overall sentiment was cautious as investors looked for more progress from tech companies, especially in areas like artificial intelligence, before regaining confidence in the sector.

Q7: What is the “Great Rotation” in the stock market?

A7: The “Great Rotation” refers to the shift from large-cap tech stocks to smaller-cap and more cyclical sectors, suggesting a waning dominance of Big Tech in driving market gains.

Q8: How does valuation adjustment play a role in this rotation?

A8: The perception of overvaluation in large tech stocks is driving the rotation, leading to potential corrections in their valuations and impacting major market indices heavily weighted towards tech.

Q9: What are the implications of broader market participation?

A9: The shift towards small-cap and value stocks could lead to a more balanced market rally, spreading gains across a wider range of sectors and companies, and potentially reducing market concentration risk.

Q10: How are small-cap stocks affected by economic conditions?

A10: Small-cap stocks are generally more sensitive to economic conditions, and their outperformance suggests growing investor optimism about the broader economy, linked to expectations of Fed rate cutsWhen the Fed cuts rates, it reduces the cost of borrowing for consumers and businesses, which can stimulate spending and investment. Fed rate cuts also have consequences that affec... More.

Q11: What role do interest rates play in the market rotation?

A11: Expectations of Fed rate cuts are driving the rotation, which could further benefit small-caps and cyclical stocks, potentially extending the trend.

Q12: How might sector performance diverge during the rotation?

A12: As the rotation continues, traditional value sectors like financials and real estate may outperform while tech stocks could lag.

Q13: What is the impact of market volatility during this transition?

A13: The transition from tech leadership to a broader market rally may lead to increased market volatility, as seen in recent trading activities.

Q14: How do earnings expectations influence the sustainability of the rotation?

A14: The sustainability of the rotation depends on whether small-cap and value stocks can meet earnings expectations. Failure to do so could lead to a reversal back to tech leadership.

Q15: What political and policy factors could influence the market rotation?

A15: Upcoming U.S. elections and potential policy changes, such as protectionist measures or regulations targeting Big Tech, could further support the move away from tech stocks.