The ugly sell-off in tech names is not necessarily an indication that the broader market is about to crack, but there could be a summer swoon, analysts say.
Big-cap tech and momentum names sold off for a second session, dragging Nasdaq lower. FANG names — Facebook, Amazon.com, Netflix and Alphabet — were all under pressure.
The worst of the selling came just at the open, and by the closing bell Nasdaq closed down just a half percent at 6,175, reversing much of a 1.6 percent loss earlier in the day. Apple traded as low as $143, but closed at $145.42, off 2.4 percent after it was downgraded by Mizuho to neutral from buy.
The Technology Select Sector SPDR XLK ETF dropped more than 2 percent in morning trading, but finished down just 0.3 percent and was turning higher in after hours trading.
"They've done great. What, are they up 30 percent year-to-date? That's a natural rotation. That's what I'm going with," said Jack Ablin, CIO of BMO Private Bank. "As long as I'm seeing other sectors rally, to me it's a rotation."
The sector has some of the highest valuations in the market. The top five drivers of the big cap tech gains — Amazon, Apple, Facebook, Microsoft and Alphabet — as of last week, had contributed about 40 percent of the S&P 500's gains this year, though they represent just 13 percent of the index, according to Goldman Sachs.
Ablin said, however, the Federal Reserve could change his view if the Fed's post-meeting statement Wednesday or Fed Chair Janet Yellen indicates the central bank would move soon to reduce market liquidity by reducing its balance sheet.
"It's very likely we're sitting at the North Pole right now. It's not going to go higher," he said. "If this is as good as it gets, and it stays there, then it's fine, but if we hear any indication on Wednesday that the Fed's going in a different direction, I think investors are going to reassess their risk posture. But right now, we don't know, and this could be a simple rotation."
Energy stocks and telecom were the beneficiaries of the sell-off in tech on Monday. The S&P energy sector was up 0.7 percent, while telecom rose 0.9 percent. Financials were up 0.2 percent, after a sharp gain Friday when technology was harder hit.
David Bianco, Deutsche Asset Management chief investment strategist, said he does not see the tech sell-off as the warning for a big correction or a breakdown in the technology and internet names. But that doesn't mean he doesn't expect a broader decline soon.
"My view is that I do agree with the idea that it's time for a summer consolidation, and likely a small dip that likely plays out over the coming months, not necessarily the coming week," he said.
Bianco said the market is anxious and it's waiting to see whether Congress can get to work on tax reform. While it's unlikely there will be a plan before August, it needs to present something after the summer recess.
"There's no fundamental canary in the coal mine in tech whatsoever," he said.
Bianco disagrees with the view that the trading into energy, financials and industrials in the past several sessions indicates that the "Trump" trade or reflation trade is back on.
Some traders said the testimony from former FBI director James Comey was a positive in that it showed that Trump was not a target of the investigation into Russia and the Trump campaign. It also did not contain any smoking guns.
"It's not Trump. It's ... 'Can Congress agree on what they were sent there to do — cut corporate taxes?'" Bianco said.
He said the valuations for the market and tech are high, but he does not have a problem with tech, which is benefiting from business spending. "We're recommending stay with tech and health care. Our preference for the summer is health care over tech," he said.
He said financials could do well in June because the Fed is raising interest rates Wednesday, a positive for bank earnings. Banks should also benefit since they are likely to be able to raise dividends after government stress tests.
Citigroup global strategists, however, did see some impact from Comey.
"It is possible that, with so little now priced in, the risk/reward for the medium term reflation/Trump trade may be favourable again. Or, at least, that negative sentiment regarding the Administration's ability to deliver is waning," they wrote.
Some of the stocks that investors had favored just after Trump was elected were being bought again, including small caps, which bounced Friday. As investors became disillusioned with Washington and lowered expectations for tax reform and stimulus, technology share valuations got richer because of their growth appeal.
Morgan Stanley equity strategist Michael Wilson said he believes the tech correction is overdue, given extremes in outperformance and positioning.
"Second, we don't think it's over and expect some follow through this week. Third, we would be surprised if this is the end for technology stocks given the very strong earnings growth we are witnessing. Fourth, if we are going to reach our 2700 target for the S&P 500, large cyclical sectors are going to need to perform so we welcome Friday's action as the beginning of better performance here which we have been expecting and writing about the past several weeks," he wrote in a note.
He said the fact that the Nasdaq sold off 2 percent Friday but the broader S&P 500 was flat is a good sign that investors are repositioning, not dumping out of equities. "In our view, that is supportive of our view that this is a correction not the end of the bull market," he wrote.
Goldman Sachs, however, is more skeptical and believes the conditions supporting the bull market, especially the highly valued technology stocks, are about to end.
"The unexpected mix of healthy growth and declining rates represents a Goldilocks scenario for U.S. equities," wrote David Kostin, Goldman's chief U.S. equity strategist, in a note. "However, just like in the fairy tale, this perfect scenario is unlikely to last."
Goldman says that either better growth causes the Fed to hike more aggressively, a negative for stocks, or the low-interest-rate environment in the bond market is actually predicting a slower economy, also a negative for stocks.
Kostin is not expecting a big market crash, and he predicts the S&P 500 will be 4 percent lower from current levels — to 2,325 by the end of the year.
The firm is not telling clients to sell big-cap tech even with the sell-off, but points to positives in the banking group.
Watch: Tech's healthy correction
