Investors Dump Tech Stocks in Favor of Value Stocks

This morning, stock index futures are pointing lower before the open, led by deep-in-the-red Nasdaq futures. The Cboe Volatility Index (VIX) moved back above the 20 level before the open. Tech stocks look to be laggards once again with Apple AAPL, Microsoft MSFT, Tesla TSLA, and Nvidia NVDA all trading lower in premarket action.

However, Oracle (ORCL) appears to be falling for a different reason, The Wall Street Journal is reporting that Oracle is in talks to buy Cerner (CERN) for $30 billion. Oracle fell 4.77% in premarket trading while Cerner rallied 16.37%.

Financial stocks could also trade a little lower on Friday because the 10-year Treasury yield (TNX) has fallen below 1.4%. The 10 years fell as oil prices (/CL) dropped 1.73% before the opening.

There are a couple of executive changes of note this morning starting with General Motors GM. Dan Ammann the CEO of GM’s autonomous vehicle company Cruise LLC has unexpectedly left the company. Some had speculated that Ammann was being groomed to replace current GM CEO Mary Barra in the future. GM is down 2.62% in premarket trading.

Darden Restaurants DRI announced better-than-expected earnings and revenue before the opening bell but lowered its future earnings guidance. It also announced that CEO Eugene Lee Jr. would retire in May of 2022. Darden was down 3.89% in premarket trading. 

Kellogg’s K management team was able to resolve an ongoing labor issue with its worker’s union. The stock rallied 3.59% on Thursday as rumors of the deal emerged.

The COVID-19 Omicron variant is pushing across New York and New Jersey prompting some businesses to shut down while others are having their employees work from home. Also, Johnson & Johnson JNJ is down 2% in premarket trading after a CDC panel recommended the Moderna MRNA and Pfizer PFE COVID-19 vaccines over the JNJ vaccine.  

On top of Omicron news and the big tech selling, this Friday is a quadruple witching day which means stock index futures, stock index options, stock options, and single stocks futures contracts expire simultaneously. As traders unwind these trades it can result in greater volatility so investors should be extra careful during the first and last trading hours of the day.

Big Tech Barrage

When the Fed sparked a late afternoon rally on Wednesday, it looked like it would usher in an early start to the Santa Claus rally. But the momentum fizzled on Thursday as investors chose to focus on value stocks instead. However, the Santa rally doesn’t technically start until after the Christmas break, so investors watching for the phenomenon still have hope.

Big-tech stocks were among the worst performers on Thursday as investors appear to be moving from growth to value stocks once again. The S&P 500 Pure Growth Index ($SP500PG) dropped 2.64%, while the S&P 500 Pure Value Index ($SP500PV) rose 0.81%. Among the big-tech growth stocks that were falling were Apple AAPL, Microsoft MSFT, Tesla TSLA, and Nvidia NVDA, which fell 3.93%, 2.91%, 5.03%, and 6.8% respectively.

Conagra CAG appeared to be a beneficiary of value shoppers as the stock rose 4.46% on the day. AT&T T, Verizon VZ, IBM IBM, and Caterpillar CAT also traded 6.95%, 4.35%, 2.29%, and 1.79% higher respectively.

Energy, materials, and financials were the strongest sectors on Thursday. If we break down the markets further, gold, telecommunications, and metals, and mining were the strongest industry groups. On the downside, technology and consumer discretionary were among the worst sectors. Software, semiconductors, and technology hardware was were the worst-performing industry groups.

After the close on Thursday, FedEx FDX rallied 7.71% in after-hours trading by announcing better-than-expected revenue and a smaller-than-expected loss. United Parcel Service UPS shared the positive news by rallying 2.82% in after-hours trading. UPS recently benefited from an upgrade by Citi analysts. FedEx and UPS are set to benefit as the caps come off the supply chain bottlenecks.  

Baring Their FAANGs

The major stocks indices have a weight problem. The S&P 500 is overweighted in certain stocks that are dragging down their performance. For many years, FAANG stocks were all the rage, and while some of the names have changed, they still have a lot of influence on the indices. You’ll remember that the FAANG stocks include Facebook, now Meta FB, Amazon AMZN, Apple AAPL, Netflix NFLX, and Google, now Alphabet GOOGL. Over time, Microsoft MSFT was included in the group, which created the FAANGM acronym.

According to Yardeni Research, as of December 10, FAANGM had a combined market cap of $10.4 trillion and accounted for 22.4% of the S&P 500. From 2013 to December 10, 2022, the FAANGM stocks have grown 814.5%, whereas the S&P 500 without the FAANGM stocks only grew 167.1%. When looking at the sectors, Apple and Microsoft make up 46.7% of the S&P 500’s information technology sector. Alphabet, Meta, and Netflix make up 47.1% of the S&P 500’s communications services sector. And finally, Amazon makes up 29.7% of the S&P 500’s consumer discretionary sector.

What all of this data means is that a great portion of the S&P 500’s performance is based on just six stocks. As investors turn from growth to value, they’re turning from stocks like these that have high valuations. Meta has a forward P/E ratio of 23.1, Amazon is 66.7, Apple is 30.7, Netflix is 46.6, Alphabet is 26.4, and Microsoft is 34.7. The S&P 500 without FAANGM stocks has a P/E ratio of 17.8. If investors continue to shift from growth to value, the indices could suffer unless the other 494 stocks can offset the potential losses in the six FAANGM stocks.  

Finding Balance

Let’s face it; it’s really hard to sell winners, especially if you’ve been in them for a while. However, being overweight in a stock carries a lot of risks as we’re seeing in the S&P 500. If a portfolio relies heavily on the performance of a couple of stocks, the portfolio may live and die with those stocks. This is why diversification is so important; it allows investors to reduce their risk in a relatively simple way. Rebalancing a portfolio is how an investor manages diversification.

Rebalancing is the process of selling a portion of your winners and shifting the proceeds into areas that are underperforming. Note: Investors are selling a portion of their winners, not all of their winners. This means an investor still leaves money in those strong stocks and allows it to grow. At the same time, it also helps you maintain the portfolio risk profile.

Rebalancing is also following one of the oldest stock market idioms, “buy low and sell high.” When you rebalance, you sell a portion of your winner, which is “high”, and redistribute it to your underperforming stocks, which are “low”. Therefore, if and when the markets shift, those underperforming stocks may be positioned to take the lead in your portfolio, while the old leaders aren’t a big risk to the portfolio. 

CHART OF THE DAY: TAKING THE LEAD. Pullbacks in the Leading Economic Indicators (LEI) graph have occurred ahead of recessions (shaded columns). The 2020 pullback was related COVID-19. The economy was very weak for a couple of months but didn’t reach the two consecutive quarters of negative GDP growth that defines recessions.
FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. Data Sources: ICE, S&P Dow Jones Indices. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Following the Leaders: The Leading Economic Indicators (LEI) graph tracks the yield curve, durable goods orders, manufacturing orders, building permits, and the stock market. Let’s look at how each of these indicators is doing.

First, the yield curve is positive, which means the difference between the 2-year Treasury yield is lower than the 10-year Treasury yield. However, the curve has been flattening. In March, the ratio between the 2s and 10s was around 1.6. As of Thursday, it was 0.78. If the ratio reaches 0.0, it’s flat, and if it turns negative, then it's inverse. An inverse yield curve commonly precedes a recession by up to 20 months.

Taking Orders: The durable goods orders report for November is scheduled to come out on December 23. However, from August to September, durable goods orders turned negative. In October, they were even more negative than in September.

The next manufacturing, or factory order, report is scheduled for January 6. The report has been a little volatile but has remained positive since April 2021. The September report grew by 0.5%, while the October Report grew by 1%.

Market Movements: Building permits basically reflect orders for new homes. The latest report for November came out Thursday morning. The report showed that applications for building permits were much higher than expected. It was also the second month in a row of rising housing permits.

Finally, the stock market as measured by the S&P 500 (SPX) is bullish because it's trading near all-time highs. Looking at a broader index, the Wilshire 5000 Total Market Index (W5000) is also bullish because it’s only 3.36% off its all-time high.  

While there is weakness in certain areas of the economy, there is also strength. And the positive direction of the LEI suggests that there’s more strength than weakness. The lingering effects of COVID-19 and its variants continue to stand in the way of greater strength. And, of course, rising inflation is another risk to the economy. However, it just might take a little time to get everyone back to work and to let the stimulus wear off to resolve these lingering issues. If this is the case, it indicates that investors may also need a little patience.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. The content was purely for informational purposes only and not intended to be investing advice.

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