There are two ways to look at yesterday's action:
- Tech is falling apart and we can tell that because a) Apple (AAPL) is cutting orders and b) there is slower cloud adoption so move your money out of winning tech and into losing non-tech.
Or
- There is nothing wrong with tech at all and there were funds liquidating winners either because they had to in order to return funds or because it is the end of the quarter and they wanted to lock in gains.
Let's attack these head-on starting with the first, because we have new information on it.
One of the sub-themes of what was going on yesterday is there is a fear that the cloud is growing slower than thought. Obviously the cloud is at the heart of the whole Internet of Things theory that is powering so much of the growth of tech. If you think about FANG and its derivatives you know they all have, as a consequence of their growth, a burgeoning amount of cloud business.
So if the cloud is slowing, as the current underlining narrative holds then FANG must be slowing.
At the same time, of course, we had the issue of Apple confusion with a concern that the iPhone 8 demand is lukewarm either because the X is out there as an alternative or because there is not as much interest in this new phone. It's very difficult to tell what's really happening with Apple but you could see the parts makers' stocks fall apart yesterday so we can't be sure other than there are genuine concerns.
Why am I not as concerned? Because the stock has plummeted ferociously and is now discounting any real growth in 2018, which I don't think is accurate.
Why am I dismissive of the cloud growth narrative? Simple: go listen to last night's Red Hat (RHT) call. In it Jim Whitehurst, the CEO, talks about aggressive cloud growth as well as concomitant growth in the private-public cloud. If you have both, that's the best of all possible worlds. That's why RHT stock is up so much as Red Hat is at the fulcrum of all companies that want to move to the cloud in any form.
Red Hat confirms what VMware (VMW) is saying, which is not only is there no slowdown but the acceleration into the private and public cloud is awesome.
Now, you might be wondering who is propagating the slowing-cloud thesis. The answer for me is frankly "I don't know." But if you listen to the Red Hat conference call -- required if you are going to own tech given the company's importance -- you will hear Goldman's Heather Bellini, one of the best of the best, ask about the very issue I am addressing.
Whitehurst not only says there is rapid adoption of on-premises cloud there is also rapid adoption of the public cloud. Red Hat talked about the success of its cloud deal with Microsoft (MSFT) as a good example. I would argue that Amazon (AMZN) -- which is Red Hat's partner -- is still doing spectacularly. Alphabet/Google's (GOOGL) cloud is a bit of a question mark but given the strong statements from the company about its growth I refuse to believe there is a slowdown either
So, to wrap it all up, I think Apple's stock discounts any current issues and the thesis of a cloud slowdown holds no water with me.
Which brings me to point number 2: liquidation and the-end-of-the-quarter programming. How can you tell when a program is on? Pretty simple: It is broad-based and yesterday was broad-based. How do you know if it is tech? Look for the stocks of other winners and make a judgment. One of the stocks that was down the most before it became a slaughter was Visa V! I took that as a sign that one of the programs was selling winners. Second piece of evidence? McDonald's MCD. That winner was being shelled throughout the session.
These two plus other tech winners including FANG demonstrate to me that this was an end-of-the-quarter lock-in program.
What more evidence do we need? Watch the reaction to the biggest winner, Nvidia (NVDA) , today. It announced huge Chinese wins with the most important accounts, arguably, in the world -- the clouds for Alibaba (BABA) , Tencent (TCEHY) and Baidu (BIDU) . It also inked a big autonomous-driving deal with a Chinese car company. Remember, Nvidia's slide began when Tesla (TSLA) allegedly abandoned them. I think this is a welcome offset.
So, take the Nvidia jump back and the Red Hat rally and you have even more evidence that this was a liquidation for tech as well as for other winners. I think there was a gigantic selloff in tech that was so huge it represented a hedge fund that wanted to raise money.
Now here's the problem: If we know it's a liquidation of some sort, or a liquidation of multiple funds, we have no idea if it is over. If it is, you have to do some buying. If it isn't you have to wait.
My instinct? Wait. The rally in the morning is too strong. If we missed it we missed it.
But I think I have made a cogent case for a non-fundamental selloff. Let's see what happens.
Apple, Google and Nvidia are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL, GOOGL or NVDA?
