LIVE MARKETS-Dow u-turns, joins Nasdaq down under
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DOW U-TURNS, JOINS NASDAQ DOWN UNDER (1605 EDT/2005 GMT)
After rallying more than 300 points, or nearly 1%, on Monday, the Dow Jones Industrial Average .DJI failed to hold its gains, and ultimately finished slightly red on the day. With this, the blue-chip average ended a 5-day win streak.
Meanwhile, the S&P 500 tech index .SPLRCT and FANGs .NYFANG continue to be beaten up. The Nasdaq .IXIC lost more than 2.5% on the day, finishing at a 6-week low.
Earlier in the session, investors were increasing their bets in favor of stocks that stand to benefit most as the economy reopens and the consumer, flush with stimulus and savings, brings demand roaring back to life. .N
The S&P Growth .IGX/S&P 500 Value .IVX ratio still fell for a 10th-straight day. That's its longest losing streak since a 12-day run of losses in September 2017.
The Nasdaq has now lost 5.2% from its April 26 record close and around 5.7% from its April 29 intraday peak.
Like the DJI, the DJ Transports .DJT lost its day's gain, and also ended down around 0.1%. Although obviously still early in the week, the DJT is, nevertheless, on track to end its record 14-week win streak.
Here is Monday's closing snapshot:
BIG TECH FACES REGULATION AND TAX THREATS, GOLDMAN WARNS(1345 EDT/1745 GMT)
With Wall Street continuing to rely on Big Tech to lead earnings growth, Goldman Sachs is warning about threats to the widely owned group, including regulation and rising tax rates.
Apple AAPL.O, Amazon.com AMZN.O, Microsoft MSFT.O, Facebook FB.O and Google-partner Alphabet GOOGL.O, which GS chief equity strategist David Kostin calls the FAAMG group, now represent 21% of the S&P 500's market cap and account for 22% of total S&P 500 capex and R&D spending. The largest five S&P 500 components at the peak of the Y2K tech bubble accounted for 18% of the S&P 500, leading some investors now to wonder whether a reversal is in store, Kostin writes in a research note.
The greatest risk to the FAAMG group may be regulation, according to Kostin.
"Recent Biden administration appointments suggest some risk of a stricter regulatory regime and tighter antitrust enforcement," he warns. "With the exception of MSFT, the other four FAAMG stocks face a laundry list of legal battles and investigations over their market power and competitive practices."
Higher tax rates also represent an outsized threat to the group. If fully enacted, President Joe Biden's proposed corporate tax plan would shave 9% off of FAAMG earnings, Kostin writes.
If Biden's proposed maximum capital gains tax rate becomes set for implementation next year, FAAMG stocks could see high levels of selling in 2021 as investors lock in the current, lower tax rate.
FAAMG stocks appreciated by $5 trillion over the past five years, accounting for 29% of the S&P 500's market cap increase over that period, according to Kostin.
CHIP STOCKS TUMBLE ACROSS THE BOARD (1222 EDT/1622 GMT)
Chip stocks are tumbling on Monday, with losses across the sector, including drops of more than 4% in Qualcomm QCOM.O and Lam Research LRCX.O.
Intel Corp INTC.O and Nvidia NVDA.O are falling about 2% each. Intel rallied in January after it announced it was appointing veteran Pat Gelsinger as CEO to help the company navigate its way out of a manufacturing crisis, but early enthusiasm about Gelsinger, who spent 30 years at Intel before becoming CEO of VMware Inc VMW.N, appears to be fading.
Atlantic Research on Sunday downgraded the chipmaker to "underweight" from "neutral", with analyst Ianjit Bhatti writing in a client note that Gelsinger's manufacturing strategy is unlikely to reverse share losses to smaller rival Advanced Micro Devices AMD.O.
The Philadelphia Semiconductor Index .SOX is down 2.7%, leaving it up just 8% in 2021, although the index remains up about 70% over the past 12 months, with demand for semiconductors far outstrippping supply in a global component shortage.
In a client note on Monday, Jefferies analysts pointed to the growth in data center chips based on ARM architecture, along with the ongoing global chip shortage, as reasons to remain bullish on semis. They said they continue to favor Microchip Technology MCHP.O, Nvidia, Marvell Technology MRVL.O and Analog Devices ADI.O.
Microchip Technology is off 1.9%, giving back much of its rally on Friday after the company reported its quarterly results, with CEO Ganesh Moorthy saying that in his 40 year career, "I cannot recall a time when the imbalance between supply and demand has been more acute."
Underscoring recent volatility in chip stocks, Monday's drop in the SOX index was on track to be the steepest in only six sessions.
ICEBERG AHEAD! NAVIGATING THE MID-CYCLE TRANSITION (1110 EDT/1510 GMT)
Michael Wilson, Equity Strategist at Morgan Stanley (MS), believes the market is entering what he calls the "mid-cycle transition."
Wilson has been getting more concerned about several factors including execution risk and what's priced in. Indeed, in mid-March, given his concerns, Wilson says he downgraded small caps and early-cycle stocks like consumer discretionary, while he upgraded consumer staples, and "suggested a move up the quality curve." At the same time, MS held to a reflationary bias, with overweights in financials, materials and industrials.
Wilson says peak rate of change and execution risk are normal as we exit the early stages of a recovery and enter the mid-cycle transition. He sees past cycles in 1994, 2004 and 2011 as comparable years to where we are now, and therefore he thinks 2021 will be similar for investors – "flattish returns for the year with a 10-20%+ correction along the way."
That said, Wilson thinks that whatever correction the market endures this year, it is likely to make higher highs next year.
"The goal as an investor is to navigate the mid-cycle transition, avoid the stocks with the biggest drawdowns and be in position to capture the next leg."
Indeed, Wilson believes the first stage of that transition appears to be well along – i.e., "taking out the most egregiously valued stocks as rates moved higher."
Wilson notes that small caps, early-cycle stocks like chips and lower-quality stocks are now underperforming, along with some reopening plays that got extended. And Wilson believes that before the transition is complete, the S&P 500 is likely to feel it too.
DOW HEADS NORTH, NASDAQ GOES SOUTH (1010 EDT/1410 GMT)
Major U.S. indexes are mixed in early trade with the Dow Jones Industrial Average .DJI on track for a 4th straight record close, while the Nasdaq Composite .IXIC is losing more than 1% and threatening last week's lows.
This as optimism that interest rates would remain lower for longer lingered, while a surge in commodity prices lifted shares of miners, energy and steel companies. .N
Energy is the top performing S&P 500 .SPX sector after a cyberattack forced the shutdown of a U.S. fuel pipeline that transports nearly half of the East Coast's supplies, initially lifting oil prices. nL1N2MX059 That said, crude is now down on the day, and a 3-2-1 crack spread (Refinitiv data), a rough calculation of refining margins, after jumping more than 11%, to its highest level in more than a year, is now only up around 3% on the day:
FANGs .NYFANG, chips .SOX, and tech .SPLRCT are among the losers.
Here is where markets stand in early trade:
NASDAQ COMPOSITE: TOUGH TO BUILD ON A WEAK FOUNDATION (0900 EDT/1300 GMT)
The Nasdaq Composite .IXIC has broken down over the past several weeks. That said, as of Friday's close the tech-laden index is only off around 3% from its April 26 record close.
Of note, however, this weakness is in the wake of a severe breadth/momentum divergence:
Indeed, the Nasdaq McClellan Summation (McSum) .AD.O, a breadth/momentum measure based on advancing and declining issues, which hit an all-time high in mid-February, collapsed to its lowest level since early October, on April 22.
With the Composite's late-April strength, this measure failed to even exceed its high from earlier in that month. The McSum has since broken below its 10-day moving average again and is threatening its recent trough.
Just since late 2018, six significant Nasdaq selloffs, averaging around 16%, were preceded by McSum divergence. The McSum does have support in the -2,553/-2,598 area, but that zone is well below Friday's -1,910 close.
Thus, if the Composite continues to crumble under the surface, it may remain vulnerable to a more protracted and deeper decline. nL1N2MT14J
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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)