Treacherous rotation? Or business as usual? It's a tough call because there are more crosscurrents at play than we are typically used to -- but perhaps we can break it down and make some sense of the whole thing.
First, you have to understand that this market has diverged from some usual patterns. When we get a tech-led selloff as we did on Friday, you usually get more follow-through than we have seen. In other words, you have a tech debacle Friday followed by a second wave of selling Monday with the money rolling into safer, household-name stocks.
But that didn't happen this time. The money came back to tech. Here's why: Almost all tech selloffs get triggered by shortfalls. On day one, a tech company will pre-announce a sharply worse-than-expected quarter, typically in some part of the hottest areas out there -- social, mobile, the cloud, connectivity, video, machine learning or artificial intelligence.
The move shocks people. Takes their breath away. We know there's no way that only one company in that huge cohort could blow up. Others have to be taken down, too. So instantaneously we get waves of selling in every nook and cranny of tech as traders anticipate the requisite downgrades and guide-downs.
On day two, research analysts begin slashing price targets and take Buys to Holds and Holds to Sells. There will be wholesale slaughter and you will wish you had sold into the morass on day one.
On day three, which would be today, the tech wreck ceases and money spreads out to other areas, typically the better-acting higher-yielders that do well when interest rates are low.
But a funny thing happened on the way to the selloff. It wasn't triggered by a shortfall or a pre-announcement. All we got was a shortseller hollering about Nvidia (NVDA) and a large hedge fund sending back money that had been in a lot of FANG names. The usual catalyst -- the shockingly botched quarter that was blamed on a slowdown in migration to the cloud, or a sudden decline in orders to what seems to be Apple (APPL) , or sudden weakness in search -- didn't happen. So there was no reason to follow up with more downgrades. There was no tech massacre.
In fact, the only thing that did happen was the unusual Sunday night downgrade of Apple, which seemed like a pile-on given that Apple had traded so terribly on Friday off a story that its fight with Qualcomm (QCOM) had gone off the rails and that would cost it mightily because Qualcomm was going to withhold a very high-speed chip from the company, something I could not confirm from the Apple side of things.
So no proximate cause. But we did get the usual cowardice from tech analysts yesterday. As is so often the case, they totally hide under the desk when they see a tsunami of selling and they wait for the tide to ebb before they come to "reit buy," or reiterate their buys.
So we saw an initial wave of selling yesterday but no follow-up because, remember, nothing was wrong and the Apple downgrade wasn't strong enough to impact that many stocks.
Here's where the big divergence comes in. Today should have been the day when every FANG and FANG-related analyst comes out and bulls their stocks with price target increases and goodies that make us feel like dopes for not buying. I expected to hear about new releases from Netflix (NFLX) and some virtual-reality release from Facebook (FB) . I would have thought we'd get a number raise for Alphabet (GOOGL) or a bump to Lam Research (LRCX) or Broadcom (AVGO) . Not even a little love for Nvidia or a refutation of the Apple downgrade. Heresy. Travesty. (Apple, Facebook and Alphabet are part of TheStreet's Action Alerts PLUS portfolio.)
The result? We got a lot of broken-field running today. We saw a smattering of financials rise, perhaps in anticipation of the Fed raising rates tomorrow. But buyers actually gravitated toward MasterCard (MC) and Visa (V) , not Bank of America (BAC) and JPMorgan (JPM) . The whole complex did have an upward bias, which was in keeping with the rotation that started last Thursday. I think today's extra boost came from the Treasury's attempt to loosen regulations, which should make banking more profitable.
We saw money flow into the industrials for the third day in a row, perhaps to get ahead of better quarterly reports? More on that later.
We had the usual backflow into the oils that we have had for several days. Nothing big, just enough to be able to get the group a little bit further off their lows, in keeping with the continued attempt to get crude stabilized at $45-$46.
But then we got some totally nutty action that is not at all in keeping with what should be happening. Ahead of a rate hike, we saw a breakout in the housing stocks. The housing stocks. After days and days of decline, we saw a jump in Home Depot's (HD) stock, a total shocker given that Scotts Miracle-Gro (SMG) slashed its forecast. But now let's go totally nutty: Scotts, after being down three, rallied hard, taking up lots of the home and home-goods stories.
That's a brand new part of the rotation, although some could say it is an extension of the buying in retail that started last week but has since fizzled out.
But let's put it all together. Before we think, well, that selloff's over and we can go back to buying, we need to address a two-part flaw in the rally. First, the tech comeback is anemic. There are plenty of techs that are still well below where they were on Thursday. If there really isn't more to the selloff, then they should be higher. Perhaps tomorrow we will get the analysts going all rah-rah, but we sure didn't get them today.
Second, all the other rallies were similarly anemic. It was grade-B rotation action, not some seething strong comeback that gives us a real launching pad.
So we had, for all intents and purposes, what looked like the end of the rotation into the banks, the retailers and the oils. And we had a less-than-enthusiastic move into tech.
That leaves a couple of scenarios that have to be considered. First, it is entirely possible that there will be some sort of surprise with the Fed, something that makes it so that today's non-tech gains are repealed and money flows back into tech as if the selloff never occurred.
Second, there's a possibility that, if the Fed is hawkish and says it wants to raise rates again, we get a continuation of the rotation that we got last week.
Finally, I think there is a possibility that the market initially gets hammered across the board and we see what this darned thing is made of when we sort through things Thursday.
I believe in my heart that this market can move higher. But it will be hard to move higher on a total lack of information or data points that makes more people feel that it's worth it to buy up here.
To me, today felt more like the end of a rotation, not the beginning, and without a new catalyst I can't see us lifting off from here unless Fed Chair Janet Yellen manages to say things are terrific, we need to raise rates and she is genuinely sanguine that the future is brighter than the past.