Traders are watching Tuesday's opening action after the rallied hard, reversed gains and ended Monday lower — a sign of potential trouble.
"Today was your first overall S&P signal that we could have weakness to come. It gapped up on news, and sold off and closed on the lows of the day. Money didn't rotate to tech and those names got pressured further," said Scott Redler, partner with T3Live.com. "The best set up for traders would be a down open, where buyers return to high beta tech."
Tech was a drag all day Monday, following a trend started in the past week when it first looked like the Senate would approve its tax bill. Now with that bill passed, the market has been rewarding companies with high tax rates and pounding the high-beta and other tech names that often have lower tax rates.
The divergence between the tech-driven and the S&P 500 is now the greatest it has been in a five-day period since the early days of the bull market, according to Bespoke. The S&P 500 is up 1.5 percent in the past five days while the Nasdaq is down about the same amount, and Bespoke founder Paul Hickey said the only time the difference between the two was greater in the bull market was in May, 2009 when the spread was 4.7 percent.
The market is already beginning to count on a 20 percent corporate tax rate even though the House and Senate must
Telecommunications companies, consumer discretionary, staples, financials and industrials all ramped higher Monday, as tech rolled over. The Nasdaq finished down 1 percent at 6,775, while the S&P 500 ended down 2 points at 2,639 after surging to 2,665. The meanwhile, ended up 58 points to 24,290.
While analysts say it's healthy to see market leadership expand beyond a few big cap tech names, those stocks have been huge drivers of the bull market. FANG – , , and Google parent all slumped along with other big cap tech names, like and .
"The divergences in the Dow and Nasdaq have been pretty glaring over the last week and heading into today," said Art Hogan, chief market strategist at B. Riley FBR. "There's not enough of a basket of value that they rotated into that can support the amount of damage that's being done to momentum names."
Hickey said to put the move in perspective, tech has been sensitive to the "Trump trade," where domestically oriented companies benefit more.
"Tech also lagged after [President Donald] Trump first got elected, the Trump trade being the more cyclically sensitive sectors. There's a brief adjustment period but after a short period of divergence, the trend will likely reassert itself," said Hickey. "Last June when we had the selloff in the tech stocks, within a few weeks it was back to the old grind. What I think the bigger issue will be for those would be if you started to see interest rates really moving higher."
When the Nasdaq and S&P diverged in 2009, the market was more volatile and the Nasdaq was more than 3 percent lower a week later but it resumed its rise, and was up 6 percent a month later. The S&P 500 also was pressured, losing about 4 percent in the first week but it was up 1 percent after a month. Since then there were other times the spread was greater than 2 percent, and in each of those occasions, the Nasdaq was higher a week later as was the S&P.
Redler said it will be important to see if there are dip buyers, which have prevented the market from having any sort of sizable correction this year. The S&P tech sector is still up 34 percent year to date, while Nasdaq is up 25.9 percent. The S&P 500 is up 17.9 percent.
"The trade changed for tech Nov. 28 when most of the high beta tech lost momentum levels," said Redler, who follows short term technicals. He said the big cap tech names fell below their 8-day or 21-day moving averages. He said it would be a positive to see the QQQs or the hold its 50-day moving average, which is just about 2 points below its $152.71 close.
"It feels like we have five different markets right now," he said. "There's been a lot less continuity in the last week that we've seen for a long time."
Redler said he puts 60 percent odds on the possibility that Monday's S&P intraday high of 2,665 will be the high for 2017.
"If you reduced risk a week ago, now you have the opportunity to see if there's a better dip to buy buy, but that has to happen soon. Otherwise, some real damage could set up," he said.
Besides the progress of the tax bill, markets will be watching the Senate Banking committee hearing and vote on Jerome Powell for Fed chairman, which begins at 10 a.m.
There is also international trade data at 8:30 a.m. ET, services PMI at 9:45 a.m., and ISM manufacturing data at 10 a.m.
, HD Supply and Bank of Montreal report before the opening bell.