The Tech Stocks Sell-off of June 10th. A Warning Signal that Should not Be Ignored

Wall Street is experiencing a bullish cycle that is more than seven months old. How long will it last? Doubts regarding the sustainability of this trend continue to rise; they are more than justified if we consider that this season of the year is the less favourable from a statistical point of view. One month ago, the S&P 500 had given an early warning signal through a pullback of more than 1% within a single session. It didn’t happen since months but the market had more or less ignored such signal since the uptrend had quickly resumed. It happens often this way: a first pullback occurs, then the stock hunters intervene at the earliest opportunity to jump into the market at prices just a bit lower than the highs, a typical behaviour reflecting the ripeness of the uptrending cycle and, by consequence, its vulnerability.

Like any other bullish trend, this one has also its leader. The sector that has constantly outperformed the market in these past months has been that of the Information Technology and, just like the old times gone, the glorious Nasdaq has collected an unbreakable string of gains in recent months.

Companies like Apple, Alphabet, Microsoft, Facebook, Amazon, have accounted for almost half of the capitalization progress in the S&P500 in 2017 through June. A rally that brings back to the mind that of the dot-com bubble of the late 1990’s, a bull trend that had ended with an implosion due to excesses, as most of us remind well.

Now, just at the end of last week, a second warning signal arrived from the hi-tech stocks, which prices plunged some percentage points in a single session driving the Nasdaq back around 2%. This isn’t a trend reversal signal yet, the major indices are still sustained by their medium term trendlines and their uptrending channels are still intact. A prompt reaction to the upside, driven by price-hunting, is quite likely, but this market phase is turning delicate. Especially if a bounce was followed by a lower high.

Usually, the summer months are statistically the less favourable to the equity investors. The chart below summarizes the average returns of the S&P500 between April and June since 1952, including those at the beginning of a presidential cycle in the U.S.A. like 2017. There is a tendency to form a cyclical top between the second and the third decade of June. Here is why we shouldn’t ignore the warning signal of last week.

Alberto VIVANTI – SAMT Vice President – Graubünden and Liechtenstein Chapter– alberto.vivanti@samt-org.ch

Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.