Last Friday the S&P 500 opened at 2436, rose to 2446, fell to 2416 and rallied at the end of the day to close little changed at 2432. Volume was maybe 10% higher than normal. Sounds ho-hum.
Look at Financials, Energy or Technology and the story isn’t one of a sleepy summer-like Friday. It’s violent sector rotation instead.
According to Google Finance, the Energy sector was up by +1.4% for the day and Financials by +0.8%. Technology fell by -2.7%.
But that understates what happened beneath the calm surface.
Oil exploration and production stocks, which have been in free fall recently, rallied by 4% or more. Large internet-related names fell by an equal amount. Market darling Invidia (NVDA) rose by 4% in early Friday trading, then reversed course to fall by 15%, and rallied late in the day to close “only” down by 7%+. That came on 5x recent daily volume.
What’s going on?
Well, to state the obvious, Friday’s stock market action in the US runs counter to recent trends. To my mind, the aggressive buying and selling are both based on relative valuation rather than any sudden change in the fundamental prospects for any of the companies whose stocks are gyrating around. It’s an assertion by the market that no matter how grim the outlook for oil, the stocks are too cheap–and no matter how rosy the future for tech, the stocks are too expensive.
This is part and parcel of equity investing. There’s always someone, usually with a long investment horizon, who is willing to bet against the current trend, on grounds that current price movements are being driven by too much emotion and not enough by dollars and cents.
What’s unusual about last Friday, to my mind, is how sharp the division between winning and losing sub-sectors has been and how aggressively stocks have been both sold and bought.
For what it’s worth, I also think it’s odd that this should happen on a Friday. Human buyers/sellers of this size tend, in my experience, to worry about whether they can execute their plans in one day, preferring not to let the competition mull the situation over on the weekend. But that’s a minor point. (One could equally argue that if the buyers/sells were looking for maximum surprise, Friday would be the ideal day to act.)
If this is indeed a counter-trend rally, meaning that after a period of valuation adjustment the prior trend will reassert itself (which is what I think), the most important investment question is how long–and how severe–the pro-energy, anti-tech rotation will be.
My experience is that it’s never just one day and that a counter-trend movement can run for a month. On the other hand, this doesn’t look like the typical work of traditional human portfolio managers. It looks to me more like trading done by computers. If that’s correct, I’d imagine the buying/selling will cut deep and be over relatively quickly. But that’s just a guess. And I know my tendency in situations like this is to act too soon.
For myself, I’ve been thinking for some time that US oil exploration companies have been battered down too much. As for tech, I still think it will be the most important sector for this year. So I’m happy to use this weakness to rearrange my overall holdings, nibbling at the fallen tech names and offloading a couple of REITS I own that I think are fully valued.