The massive drop, was an unusual unsynchronised move in the USA markets as it a rotation out of overvalued tech stocks to underforming energy and banking stocks or a precursor to a large scale market melt down? That’s the questions on trader`s mind.
Energy and banks have been underperforming while tech (especially internet) has been outperforming Traders are avoiding sectors that have run up sharply without the backing of earnings momentum. US stock market rally have been led by a few tech stocks for some time, fuelled mainly by PE reratings. As this blog have been warning last month of a 15% imminent market correction on the Nasdaq on signs of prices on the charts completing the Trend Rotation Cycle. As the market rally matures, investors should avoid stocks that have run up entirely on PE rerating without a commensurate increase in earnings. This is even more relevant for the tech sector, which has outperformed strongly. Asia tech stocks which have rallied 40% have limited upside , stocks at risk are Alibaba (BABA US),TSMC (2330 TT),NetEase (NTES US). Investors
The Fed is set to lift rates this week, leading a pack of central banks that are mostly nodding in the direction of removing ultra-accommodative policy. Yellen & Co. is also expected Wednesday to map out how to unwind a $4.5 trillion balance sheet. How the Dow performed and respond to Nasdaq fall this week will determine whether Nasdaq fall is part of a bigger market correction or just a market rotation to the more undervalued stocks. Watch the price action on Dow and S & P for any spillover weakness.
All posts and charts are for educational and illustration purposes only