The Sector Rotation Out Of Tech Continues

Another Bad Day For Tech

Tech stocks had a terrible day as the Nasdaq was down 0.85% and the S&P 500 tech sector was down 0.87%. The defensive real estate, consumer staples, and telecom sectors were all up more than 1%. This is a sign the sector rotation continued in a somewhat flat day as the S&P 500 was only down 0.29%. Facebook stock was up 0.53% as the selling pressure may have peaked. The worst of the big tech names were Amazon, Netflix, and Tesla. Just after I mentioned Amazon not having any fundamental issues, the company’s stock fell 4.38% on the news that President Trump wants to go after the company over its sales tax policies and its contract with the USPS. The White House said there aren’t any new policies to announce, but the news story increases the odds of further action at some point in Trump’s term.

Bond Vigilantes Coming For Tesla

As you can see from the chart below, Tesla’s bonds have sold off along with its stock as investors are worried about the firm’s ability to produce Model 3 cars, sell them profitably, and see demand grow. What has been working for them is the ability to raise capital via equity. With the stock’s 7.67% decline on Wednesday, it’s now down 27.88% since February 26th. This makes the stock’s decline a sell-fulfilling cycle. The less confidence investors have, the lower the chance of success. Tesla has been lucky that the credit and equity markets have been favorable in the past 8 years. It’s doubtful the firm would be able to stay solvent in a risk off period. That’s shocking because the company was almost shuttered in 2008. 10 years later, the firm still is far from being consistently profitable. The latest negative headline about the firm is the use of automation in production where it is inefficient.

Netflix Is An Important Signal

Netflix is probably the face of FANG right now because prior to the recent selloff its stock was up 73% year to date. It has been the big consumer tech name with the most momentum. It fell 4.96% on Wednesday and is down 14% from its peak. Just like how investors are trying to figure out if this is a correction or a bear market in equities, investors in Netflix are trying to understand if this is profit taking or the start of a new downtrend. Some might think it’s obviously profit taking because no major negative catalysts have occurred in the past few weeks. However, sentiment is possibly more important than fundamentals for this stock. To show why I think this, I’ll ask: Did Netflix show enough fundamental improvement to justify a 73% move in 2.25 months? Probably not. The momentum trade will keep going until the market exhibits a phase change. With the Fed raising rates 3 or 4 times this year, a change can come sooner than later. The action in Netflix will tell you where the overall market is headed and which sectors will do well.