As the Wall Street adage warns: Stocks take the stairs up, but the elevator down. That was on full display Friday as the dreamy, parabolic rise of the “FAANGs” devolved into a bloody nightmare of a selloff, with Apple Inc. (NASDAQ:AAPL) giving back nearly 4%.
The rest of the market held it together thanks to boost a rise in Treasury yields provided to financial stocks.
In the end, the Dow Jones Industrial Average gained 0.4%, the S&P 500 lost 0.1%, the Nasdaq Composite lost 1.8% (worst day since last June) and the Russell 2000 gained 0.4%. Treasury bonds weakened, the dollar strengthened, gold lost 0.6% and oil gained 0.4%.
Breadth was positive with 1.7 decliners for every advancer while volume was heavy, at 112% of the NYSE’s 30-day average. Energy stocks led the way with a 2.5% gain while tech stocks fell 2.7% as a group.
The acronyms above are the various monikers for the small group of mega-cap stocks like Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and AAPL that have been driving the Nasdaq to new highs while the rest of the market languishes in a sideways pattern going back to early March.
AMZN even suffered an intraday “flash crash” — a rapid, computer-driven flush to a loss of more than 8% before rebounding. If the drop had stuck, it would’ve been the largest one-day decline since 2014, back when the stock traded around $300 a share. Not the $1,000-a-share level the stock closed above earlier this month to great celebration.
It’s worth noting just how extended AMZN’s valuation has become, in case anyone out there still actually cares about the fundamentals. According to Goldman, AMZN is trading at an 89x price-to-earnings multiple vs. an average multiple of 58x for the core dot-com bubble stocks back in 2000. Free cash flow margin stands at 7% for AMZN vs. 19% for the dot-coms in 2000. And return on invested capital stands at just 10% vs. 16%.
There is no other justification for AMZN’s rise: Investors were simply chasing momentum for momentum’s sake.
But what of the nice gains for bank and energy stocks?
We could be seeing a massive sector rotation as the “Trump-flation” trade that dominated between November and March makes a return after the underwhelming testimony of former FBI director James Comey to Congress on Thursday — clearing the air of impeachment and obstruction of justice from President Trump.
Investors are looking at relative value here: Tech is up around 19% for the year to date while both exploration/production and oilfield services stocks are down more than 20% for the year. Banks are getting a lift thanks to a small backup in long-term yields (boosting net interest margins) and chatter that upcoming “stress test” results from the Federal Reserve could allow higher capital returns to shareholders.
Next week, all eyes will be on the upcoming Federal Reserve policy meeting, updated economic projections, and press conference by chairman Janet Yellen. There’s a lot on the table here. Although the futures market has priced in another quarter-point hike, the Fed’s current rate path forecast is much more aggressive than where the market is. The Fed is looking for another two hikes this year and the start of a balance sheet taper; while the futures market expects only another two hikes through 2019.
This, along with the fact stocks have badly separated from the recent disappointments on the economic front — as the data is missing analyst estimates on a scale not seen since early 2016, when oil prices were collapsing — will need to be reconciled.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers.