What's behind the big market swing from tech to banks

Key Points
  • Big tech names have slumped over the past several days while banks have taken over market leadership.
  • Market pros see the trade as part of a broader whipsaw sector rotation this year that has benefited active managers engaged in stock picking.
The tech sector can't lead the market forever: Strategist
The tech sector can't lead the market forever: Strategist

Technology stocks are getting beaten up and banks have surged as part of a broader trend that has hit the market this year, where yesterday's hot hands are today's also-rans.

The two sides have exchanged market leadership over the past week or so thanks in good part to some of the tech industry's biggest names falling hard. In the seven-day stretch, Netflix shares were off about 8.5 percent, Apple was down 6.5 percent and Alphabet fell 5.3 percent, as of trading around midday Monday.

During the same period, the financial sector broadly gained 3.3 percent with banks specifically up around 4.6 percent. Charles Schwab, Raymond James and KeyCorp have been among the financials leading the way.

The driver behind the trade, though, may be less about long-term fundamentals and more about rapid shifts of money looking for a bargain. Market pros cite a whipsaw market this year, where investor cash is chasing stocks that either have been beaten down or will benefit from the ever-changing economic winds. A stormy time in Washington has played havoc with growth expectations.

"The good news is the money continues to find a home in sector rotation. The bad news is, that's hard," said Art Hogan, chief market strategist at Wunderlich Securities. "That's where it gets dangerous, that sort of active management selection process. You have to be on the right side of trends that happen very quickly."

To Hogan's point, financials were the market darlings in the days after President Donald Trump's victory in the November election. The sector flashed higher, gaining nearly 30 percent, before flattening out and turning downward over the past three months or so.

Coversely, technology struggled initially, moved gradually higher through 2017, then spiked around mid-April. However, the market leaders have faltered lately.

"It's hard to know what flipped the switch, but we started to mean-revert," Hogan said.

Pedestrians pass in front of the New York Stock Exchange (NYSE) in New York, June 9, 2017.
Michael Nagle | Bloomberg | Getty Images

Opportunity for stock pickers

Stomach-churning though they may be, the moves have presented opportunities. Active managers, who have struggled for years in the low-volatility bull market, are having more success this year, with about 55 percent beating their index benchmarks.

If the trend holds, there's likely to be another rotation not too far out on the horizon.

"Most likely [the tech decline] is just a valuation pause," said Jim Paulsen, an economist and strategist. "That has to play out over a couple weeks. To the extent that it does, I think that's a good buying opportunity."

Indeed, the recent tech downturn isn't scaring money away from the sector.

The Power Shares QQQ Trust, an exchange-traded fund that tracks the tech-barometer Nasdaq index, has taken in a healthy $805 million over the past week, pushing its total inflows this year to $2.9 billion, according to FactSet.

At the same time, though, the Financial Select Sector SPDR fund has pulled in $240 million during the same period, while the SPDR S&P Regional Banking ETF has attracted $208.5 million.

Banks are benefiting from a variety of factors, including the likelihood of a Fed rate hike this week as well as the release of stress test results, an event that usually accompanies announcements that more cash will be released for shareholders in the form of dividends.

How long that trade lasts, though, is a question in such a quirky market atmosphere.

Watch: The best bank stocks you can still buy

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