Morning Comment: Tech looks particularly vulnerable

In our weekend piece, we said that the fact that the stock market was extremely expensive (and that leverage was extremely high) meant that the risk/reward equation was heavily skewed to the risk side of that equation. In other words, we said,
it means that “the stock market is way more vulnerable to a meaningful decline than it usually is.” Therefore, we said, “Investors should seriously consider rising more cash than usual.”

Our biggest concern had been that the massive levels of stimulus that had helped the market rally in such a powerful way over the past 15-16 months would become less plentiful…and that this development would cause a correction in the stock market. However, we also said last weekend that the catalyst when the market gets extremely expensive is not always a definitive one. We said, “Sometimes that catalyst is merely a group decision by investors to stop buying and start selling for no obvious reason. That’s what happened at of the top of tulip bubble and at the top in stock market in 1929. There was no real event that sparked the change in investor psychology, it just happened all of a sudden.”

The futures are looking much lower this morning, but that does not necessarily mean that we are seeing an important top in the stock market. In other words, despite what we just stated in the first two paragraphs, we are a LONG WAY from declaring that we are in the early stages of a full-fledged correction. However, the pronounced move in the Treasury market recently and the underperformance of the Russell 2000 during the most recent jump in the broad stock market shows that a summer swoon is very possible. It just means that maybe the catalyst will not be the change in Fed policy (like we have been thinking). Instead, the move in the Treasury market and the small-cap Russell 2000 index shows that the catalyst just might be a sudden shift in concerns about a slowing of the trajectory of the level of growth here in the U.S. in the second half of the year.

One of the questions that will come to the fore if today’s early morning decline turns out to be more than a one-day-wonder is what group(s) will get hit the hardest if (repeat, IF) we do indeed see a correction over the summer. Well, since we’re big believers in technical analysis, we believe that the groups that are the most overbought right now will be the most vulnerable. This means that the tech group could/should see some considerable weakness if today’s decline turns into something bigger.

As we highlighted recently, stocks like NVDA, MSFT, AAPL, GOOGL, INTU, NET have all become quite overbought on a short-term basis. The Nasdaq Composite index and XLK technology ETF have become overbought as well. Of course, some are more overbought than others, but we’ll highlight the charts on AAPL and the XLK this morning. (We’ll also update the chart on NVDA. As we highlighted this past weekend, it had become extremely overbought on a short-term basis. It has already seen some weakness this week, so we’ll highlight its MACD chart which shows that the weakness it has seen so far this week is likely the beginning of a decent sized correction in the stock.)

We have said many, many, many times that NDVA and many of the other overbought tech companies are GREAT companies. However, the stocks of these great companies can frequently get ahead of themselves on a short-term basis (and sometimes even on an intermediate-term basis). Therefore, we are not saying that long-term investors should dump these names in an aggressive manner. However, they should still consider raising some cash in these (and other) names right now…so that they have money to put to work once a correction has played out.

Again, this might not be the beginning of a correction, but we have to remember that corrections take place almost every year! More importantly, since these tech stocks have become meaningfully overbought, their upside potential should be limited whether we see a full-blown correction or not. Therefore, FOMO should not be a big concern in many of these tech names over the near-term. In other words, if we’re wrong and today’s decline in the broad market turns out to be a very short-lived one, you’ll be able to buyback anything you sell in the tech group at/near current levels for several weeks. They’re so overbought that they’re unlikely to run away from us at these current overbought levels.

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Jul 08, 2021 — 9:07 AM
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