So Goes Tech...

So goes tech… Stocks sold off hard in yesterday’s session led by high flying tech shares as investors appeared to be locking in gains.  Weekly unemployment numbers came in better than expected, but it was not enough to curb the selling.

N O T E W O R T H Y

Great expectations.  Yesterday was one of those days which had many professionals looking twice at their screens to make sure that they were seeing the numbers correctly.  Non-professionals could be found bringing their smartphones closer to their eyes followed by looks of astonishment… “is this right?”. Well unfortunately, the numbers they were seeing were correct. They were red and they were big… and mostly unexpected.  Investor behavior is an interesting thing. Have you ever walked out into the streets and seen a few people staring into the sky?  Your first reaction is look into the sky to what they are looking at.  You don’t want to miss out.  Investors behave in a similar way with the markets.  As a stock starts to go up, for whatever reason, investors start to take notice.  Some jump in, adding to the momentum. Ultimately the stock's growth proves irresistible to the masses as they too, start to buy, fearing that they might miss out on the next big thing.  The rush into a popular stock gives the shares yet further upward momentum. Momentum in stocks is a very real factor and happens to be one of just a  few which have statistical significance.  But like all things, such a powerful tool is best used by a trained expert.  The thing about momentum is that it plays on volatility.  If a stock has high volatility combined with high momentum, we experience what appears to be explosive growth. The thing about volatility is that it goes both ways.

By now it is old news that the technology sector is hot.  Mega cap tech shares have driven the Nasdaq and S&P500 into uncharted territory.  To be sure, the stocks doing the driving are good stocks that have solid fundamentals and great growth potential.  But still, just how far can they rally before even the most curious latecomer investors stop buying?  That, of course, is the big unanswered question that every investor wishes they knew. Conservative traders are usually the first to exit a hot growth stock and take profit, content with leaving some upside on the table. They exit in a methodical and largely unnoticed way.  The more aggressive traders attempt to squeeze as much as possible out of a rally and wait until they get the first sense of blood.  It is that group that typically starts the selloff as they rush in to take their quick profits off the table. Unfortunately, the last traders to exit are usually, smaller, less sophisticated ones who do not have the tools to watch the markets closely.  More unfortunate for that group is that those are usually the last traders to join the rally.  In other words, they typically pay far more for the rallying stock and most likely to be at a loss.  All of these behaviors lead to high volatility.  I didn’t even mention the high-frequency algorithmic traders that only serve to accentuate the volatility.  Back to volatility.  I said up above, as I have written many times in my notes, that it goes both ways.  The VIX, which is a measure of S&P500 volatility, closed out August at 26.41.  That was the index's highest close since July 16th.  At that level, the index anticipates monthly S&P500 swings around +/- 7.6%. As you know, we have been experiencing mostly “+” lately, as the index has had 5 straight weeks of gains leading up to this one.  I feel compelled to also mention that the S&P500 also logged 5 straight monthly gains through August.  Yesterday was a reminder that there is also a “-“.  It was a very stark reminder, indeed. The VIX closed out yesterday’s session at 33.6, which predicts monthly moves of +/- 9.7%.  For longer term investors, all of these daily ups and downs are stressful, but they should not serve as a deterrent, simply a reminder about the importance of a long-term, diversified, methodical approach.  The temptation to jump into “hot stocks” on a whim has been strong lately, but now more than ever, investors must stay focused on their long term goals.

THE MARKETS

Stocks sold off in yesterday’s session on what many believe was profit taking after the recent strong up move.  The S&P500 fell by -3.51%, the Dow Jones Industrial Average dropped by -2.78%, the Russell 2000 traded off by -2.99%, and the Nasdaq Composite gave up -4.96%.  The tech-heavy Nasdaq’s big drop may be unnerving, but to put it in perspective, yesterday’s big move took the index back to where it was… um… last Tuesday.  Bonds rose yesterday and 10-year treasury yields gave up -1 basis point to 0.63%.

NXT UP

- Change In Non-Farm Payrolls (Aug) is expected to show an addition of 1.25 million jobs, down from last month’s 1.763 million additions.

- Unemployment Rate (Aug) may have dropped to 9.8% from 10.2%.

- Baker Hughes Rig Count (Sept 4) may show a drop in rigs to 252.67 from 254.0.

- Next week is a short week with markets closed on Monday in observance of the Labor Day Holiday.  In the balance of the week we will get CPI, PPI. and JOLTS Job Openings.  Check back on Tuesday for calendars and details.

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