Can Tech Help Build A Market Bottom?

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(Monday Market Open) The bulls appear ready to make another run at the March lows around the 4,200 level as the S&P 500 futures gained more than 1% before the opening bell. Stocks look to bounce back after Friday’s Fed-friendly jobs report signaled that the Fed had no reason to reduce its aggressive rate hike plans. Friday will be another big data day this week with the May Consumer Price Index (CPI) updating the U.S. inflation picture.  

Potential Market Movers

Despite equity index futures pointing higher, the Cboe Market Volatility Index (VIX) was also higher in premarket trading, possibly suggesting that Monday’s early morning bullishness isn’t as strong as it may appear. The 10-year Treasury yield (TNX) was about 1.5 basis points higher premarket which could be a bit of a drag on growth stocks.

The Chinese markets had a mostly positive Monday as Beijing lifted a number of COVID-19-related restrictions with Shanghai and a few other provinces. The Hong Kong Hang Seng rallied 2.71% and the Shanghai composite rose 1.28%. China could get additional support as Washington looks to provide some tariff relief though some worry that such relief could run counter to the Fed’s inflation-cutting goals.  

Speaking of inflation, Brent crude oil futures reached $120 per barrel on Friday. While oil futures were slightly lower early Monday, China coming back online could increase the demand for oil. On the supply side, we learned last week from OPEC+ that they’ll marginally increase production to help offset some lost Russian oil supply but the sanctions on Russia are leaving a hole in the oil markets.

A few stocks are making moves too. Amazon AMZN starts trading at its new stock split price this morning. The company split its shares 20-to-1 and is expected to trade around $122 per share after the opening.

While earnings season is now in the rear-view mirror, the earnings calendar is relatively empty, But there are a few stragglers of note this week. This morning, Sanderson Farms (NASDAQ: SAFM
SAFM) rose 1.6% in premarket action after beating on earnings and revenue estimates. 

Reviewing the Market Minutes

Stocks ended the week on a down note with the Nasdaq Composite ($COMP) falling 2.47% on Friday, followed by the S&P 500 (SPX) at 1.63% and the Dow Jones Industrial Average ($DJI), which closed 1.05% lower. The Nasdaq ended the week 1% lower from last Friday, while the S&P 500 lost 1.2% and the Dow fell 0.9%.

Stocks were pulled lower on Friday by Tesla TSLA, which fell 9.22%, and Apple AAPL, which tumbled 3.86%. Tesla fell on bearish comments from CEO Elon Musk about weakness in the economy. Apple fell on news from Morgan Stanley MS analysts who expressed concern over lower sales from the App Store.

The industrials sector was the top performer for the shortened trading week as the Industrials Select Sector Index advanced 1.62% from Tuesday’s opening. It was followed by the Materials Select Sector Index, which gained 0.45%. Defensive sectors including utilities and health care were the week’s worst performers.  

May was once again dominated by the energy sector, which caused the Energy Select Sector Index to rocket more than 13% higher. The Utilities Select Sector Index was second, rising nearly 4.5%. The consumer discretionary sector had the worst performance as the Consumer Discretionary Select Sector Index closed the month 6.32% lower. However, the Consumer Discretionary Index was down more than 17% on the month before taking back some lost ground.

May’s performance was a microcosm of overall sector performance from January 1 to May 31.  The Energy Select Sector Index finished on top for the month, gaining nearly 46%, followed by the Utilities Select Sector Index at 4.62%. As of May 31, these are the only two S&P select sector indexes in the green year-to-date (YTD). The Consumer Discretionary Select Sector Index was down more than 26% YTD followed by the Technology Select Sector Index at 19.26%. With that said, consumer discretionary, technology, and real estate are the only sectors underperforming the S&P 500 (SPX). 

CHART OF THE DAY: COMPONENTS. The Technology Select Sector Index ($IXT—candlesticks) has fallen about 15% in the last six months. While all industry groups have fallen, they haven’t fallen at the same rate. IT Services ($SP500#451020—gray) fell 5.65%, Technology Hardware, Storage & Peripherals ($SP500#452020—pink) dropped 9.61%, Communications Equipment ($SP500#452010—red) tumbled 17.31%, Electronic Equipment & Instruments ($SP500#452030—orange) decreased 17.5%, Software ($SP500#451030—blue) slid 19.18%, and Semiconductors & Semiconductor Equipment ($SP500#453010—yellow) plunged 21.45%. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results. 

Three Things to Watch

Short Circuit: Despite the much-talked-about chip shortage, semiconductors have underperformed the market and the technology sector. Semiconductors haven’t been able to benefit from the chip shortage in part due to China’s COVID-19 lockdowns and the time it takes to get new plants up and running.

Now, as many analysts and companies are seeing a potential slowdown in the economy, semiconductors could continue to struggle. Thursday’s car and truck sales report is an example of how the chip shortage is actually contributing to the economic slowdown. The auto industry has been hit hard by the chip shortage an many new vehicles are sitting around waiting for chips to arrive. Nearly every auto manufacturer reported a double-digit drop in sales over the last year because automobile companies couldn’t get cars to the market. The lower supply of cars and trucks has caused prices to rise, making new vehicles less attractive to consumers already feeling the inflation pinch.

On Friday, chipmaker Micron (MU) fell 7.12% on Friday after being downgraded by Piper Sandler, which cited a weaker consumer as part of the reason for its downgrade.

Tech Staples: The IT services group includes data processing and outsourced services like payment processors. In the S&P 500, the group includes payment processing companies like Visa V or PayPal PYPL but also payroll companies like Automatic Data Processing ADP and Paychex PAYX. Additionally, technology consulting companies like IBM IBM and Accenture ACN fall into this group. Then internet service and infrastructure companies like VeriSign VRSN and Akamai AKAM help round out the assortment.

While these companies have obviously seen some cyclical swings to their stock prices, the relative stability shows how the industry group helps provide a backbone to the technology sector. This makes them a technology staple.

Cutting Edge: Many investors are hoping the market is in the process of building a base or bottom where it can launch a rally. As technology is often a leading sector during market recoveries, it makes sense to try and examine performance in these individual industry groups to see if one or more will help lead stocks higher. However, each industry group is currently in a downtrend. It’s why some investors compare picking market bottoms similar to catching a falling knife. Therefore, looking for a potential reversal must be done with caution.

Notable Calendar Items

June 7: April Consumer Credit, U.S. Trade Balance and earnings from J.M Smucker SJM, Verint Systems VRNT, and Cracker Barrel CBRL

June 8: Earnings from Campbell Soup CPB

June 10: May Consumer Price Index (CPI) and preliminary University of Michigan Consumer Sentiment Index Results

June 14: Producer Price Index (PPI)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.

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