Today Is Rotation, So Far

When we see declines in broad equity market indices, however rare and shallow they might be lately, it is reasonable to think that most stocks are selling off.  That is not the case today – more S&P 500 (SPX) sectors are higher than lower.  Instead, we see how concentration in megacap tech shares can muddy the picture.

As I type this, roughly half the SPX components are up on the day even as the index is about -1/3% lower.  At the same time, the Nasdaq 100 (NDX) is down nearly -1%, showing that large tech stocks are the underperformers.  On a sectoral basis, only three are lower: technology, communications, and energy.  Considering that most of the “Mag 7” and related stocks fall into one of those first two sectors, and that those stocks are among the most highly weighted in SPX – and certainly NDX – it is no surprise that the popular indices are lower. 

One day of modest profit-taking should not be considered worrisome, and as of now it isn’t.  Concerns will arise if the selling in megacap techs continues because that would provide inexorable downward pressure on key indices.  In March and April we saw how that could transpire, with NDX vastly underperforming an already shaky SPX.   Crowded trades can become treacherous if there is a rush to the exits.  Selling pressure often begets further pressure, especially in momentum-driven markets.  The same traders who enjoy riding the uptrends tend to do the opposite when the trends reverse.  Also, if traders and investors are almost fully long at the top, they don’t have much ammunition to buy the dips when they occur.

It would be easier to be fully unconcerned about a one-day dip if there weren’t significant catalysts lurking on the horizon.  We wrote at length yesterday about the possibility that Chair Powell could lean into the risks of immediate, aggressive rate cuts in the face of nascent price pressures even ahead of the full implementation of tariffs.   That could put a damper not only on momentum trades but also on a range of smaller cyclical stocks that are hoping for a more favorable rate climate. 

More specific to tech, we also have Nvidia (NVDA) earnings due a week from tomorrow.  NVDA is not only the largest component of market capitalization weighted indices, but it has become the bellwether for all things related to artificial intelligence.  AI has been a key catalyst and component of the current bull market, so if NVDA signals any disruption to the current trends, it could reverberate not only through tech, but into the broader market as a whole.

Yet we see relatively sanguine assumptions coming from volatility indices.  VIX has rebounded a bit today after closing below 15 yesterday, though its 15.68 level hardly shows high expectations for volatility over the coming month.   Even stranger, the VIX9D index level of 15.03 shows that even less volatility is expected over the coming nine days.  Remember, those include not only Jackson Hole and NVDA, but also Walmart (WMT) earnings on Friday.  Today’s trading shows a modest move away from major tech stocks, but hardly any overwhelming concern about the market’s health overall or much demand for hedging protection even at relatively low prices.