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Tech Sector Faces Its Time in the Barrel
09/11/2020 9:14 am EST
Whether the recent selloff in mega-cap tech stocks is a simple correction, or a sign of a much larger move, investors should prepare for extended volatility, reports Mike Larson.
I’m guessing Icarus (from Greek mythology fame) enjoyed his flight over the Mediterranean Sea — for a while anyway. The view off the coast of Crete must’ve been nice the higher he flew.
But of course, it didn’t last. Flying too close to the sun melted the wax holding his wings together. And that was that.
Are there parallels to modern markets in the ancient Icarus myth?
Well, just look at the recent performance of mega-cap tech stocks like Tesla, Inc. (TSLA) or any of the FAANG stocks. These companies were trading up, up and away. Ditto for smaller cap but still extremely popular tech names, like DocuSign, Inc. (DOCU) and Zoom Video Communications, Inc. (ZM).
But things changed quickly over the last several days – and now, there’s plenty of melted wax to go around! Most tech names have dropped anywhere from 5% to 20% in the blink of an eye. That just shows how fickle a friend momentum can be.
Of course, these stocks all still boast massive gains over the longer term. For example, Tesla was showing phenomenal year-to-date gains of more than 380% as of last Friday’s close, while Zoom was up more than 430%.
But you could’ve said the same thing at the beginning of the major tech turn in March 2000.
That was right at the end of the dot-com bubble. The era’s tech stars large and small started giving up their gains and just couldn’t find their mojo again. The Nasdaq Composite ultimately shed 89% of its value over the next couple years.
Now, it’s way too early to say for sure whether history will repeat itself.
But there are things you can look for now to get an idea about where markets are headed.
If this is just a minor correction, we’ll see investors jump right back into leading tech names. Momentum will return and most traders will quickly forget the early-September sell off.
If it’s something worse getting underway though, you’ll see investors aggressively sell into that bounce. Momentum will accelerate to the downside and losses will build quickly given how overbought these stocks got.
Given the uncertainty, here are three steps I’d recommend you take:
- If you have lots of exposure to the tech sector, treat this increased volatility as a wake-up call. Use bounces to lighten up on tech and diversify at least some of your funds into other sectors.
- The best place for those reallocated funds are stable dividend-payers in “boring” sectors and gold and silver mining shares. They’ve been phenomenal performers, too, as my Safe Money Report subscribers can attest.
- If the tech selloff gains steam, it’s going to be a problem for the stock indexes given how tech-heavy they’ve become. Just five mega-cap tech names accounted for 26% of the S&P 500’s market capitalization at the end of August. You’re going to want to own some bonds and have a higher allocation to cash.
We will likely see some of the hot money rotate into cheaper, beaten down, forgotten stocks that offer more value. I’m combing through sectors like industrials and consumer staples to identify potential investments that would benefit. You might want to do the same.
And don’t forget the lessons of mythology and history. They can apply to modern markets, too!
My Safe Money Report focuses on these kinds of stocks, which include names in the consumer staples, food and beverage, retail, and health care sectors. Subscribe to Safe Money Report here…
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