Script Flipped as Tech Gets De-FAANG-ed, Laggards Lead
06/13/2017 2:53 am EST
Start shifting out of growth and into value, as well as out of high-octane tech and into energy, financials, and industrials. You can do this using so-called “style” ETFs, asserts Mike Larson of Weiss Ratings.
Now, that’s a reversal!
Just a few days after I wrote about how tech stocks were surging ...while many other sectors were badly lagging...the market script got flipped. Tech leaders like Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), and Alphabet (GOOGL)...collectively known as the “FAANG” stocks ...got de-FAANG-ed, while financials, industrials, and even lowly energy names soared.
On Friday, June 9 alone, the Nasdaq Composite fell by 1.8% while the Dow Jones Industrial Average closed at a record high. One of the strongest of this year’s momentum darlings, chipmaker Nvidia (NVDA), soared above $168 out of the gate that day...then plunged to as low as $142-and-change.
These are very rare events. But so too was the action preceding it in 2017. Consider that the FAANG-led Nasdaq-100 was up more than 21% year-to-date through late last week, while sectors like financials and small caps were essentially unchanged and energy was down 15%.
So what happened? And what does this crazy action mean for investors and traders going forward?
It’s tough to pinpoint a specific catalyst for the leaders-to-laggards shift. It’s not like one of the FAANG names warned of lousy earnings, or a bunch of analysts came out and downgraded the group. Nor did OPEC announce some new production cuts (which would help energy) or the Federal Reserve hike interest rates (which would help financials).
Instead, it looks like the divergence simply got way too extreme and investors and traders decided to start switching horses. Or as I wrote in my last commentary:
“I can’t say for sure when the trend will end. Nor can I say what might change the energy sector’s fortunes...What I do know is that this ratio is getting aawwwfffulllyyyy stretched. It also seems like everyone and his sister is already on board the tech stock train. So you may want to start leaning against the crowd.”
As for the future, I’ve seen dramatic shifts like this before. My experience is that they usually herald a longer-term trend change. Just look at what happened in 2016.
During the first half of last year, gold miners, utilities, consumer staples, and other “slow economy/low volatility/safe dividend” plays were all the rage. They outperformed nicely through early July.
But then it was like someone flipped a switch. Those stocks began to lag, while other higher growth/higher inflation sectors like financials, basic materials, industrials, and technology took the lead. That shift really accelerated after Donald Trump was elected in November.
If you wanted to keep your portfolio humming along in 2016, you had to go along with the emerging flow of funds. I recommend you do the same thing now in 2017. Start shifting some money out of growth and into value, as well as out of high-octane tech and into energy, financials, and industrials.
You can do this using so-called “style” ETFs, such as by selling the SPDR S&P 500 Growth ETF (SPYG) and buying the SPDR 500 Value ETF (SPYV). Or you can use “sector” ETFs, such as by selling the Vanguard Information Technology ETF (VGT) and buying the Vanguard Energy ETF (VDE) and Vanguard Financials ETF (VFH).
Or better still, get even more granular. Use the tools available at our Weiss Ratings website to zero in on the strongest, highest-rated stocks in each sector and buy them (rather than a more-generic ETF). Then sell any low-rated stocks you own in sectors that may be falling out of favor.