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Stocks could slide further as rates rise & Big Tech drags market


Traders on the floor of the New York Stock Exchange, with Blend signage, July 16, 2021.

Source: NYSE

Strategists see more selling ahead after stocks sold off Tuesday, led downward by tech and large cap growth names.

A sharp jump in interest rates over the last several sessions stung the market, particularly the growth names. The benchmark 10-year Treasury yield had reached 1.56% at its highest Tuesday. This was a quarter of a percentage point increase since Wednesday’s Federal Reserve meeting.

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The S&P 500 ended the session down 2%, but the Nasdaq was off by 2.8% because of the large concentration of tech names in the index. Tech was the worst performer, losing 2.9% in 10 out of 11 sectors Tuesday. Energy was the best performer, up 0.4%

“We’re seeing a gap down decline that is being driven by the mega caps broadly, which are down anywhere from 2% to 5% at this time,” said Fairlead Strategies founder Katie Stockton during the afternoon sell-off. She noted that shares of Apple, Amazon, Facebook, NVIDIA, and Microsoft fell sharply. She said that these names were “clearly” the largest drags on the stock exchange. They are shaking sentiment because they’re the largest.

Stockton said those stocks, plus Tesla are about 25% of the S&P 500. She advised that you keep an eye on their momentum. It is not just their footprint that creates problems. It can impact sentiment when they do this. The trust that Google and Microsoft would never fall was a common belief. They are now getting a reality check.

Stockton said she is watching a downside target of 4,238 on the S&P 500, a level of former support. The S&P 500 closed at 4,352.63.

CFRA’s Sam Stovall said he’s been expecting a sell-off, and says the S&P 500 could now test 4,128, its 200-day moving average. A decline below that level would place it more than 5 percent below its current levels, and around 10% peak-to-trough.

Below key levels

The S&P 500 was below its 50-day moving average Tuesday, after recovering it and rallying above it at the end of last week. Although the 50-day was breached last week, it had been reestablished by the close of the week. When the index drops below the 50-day, it’s considered a negative indicator.

Stovall noted that the upside was being caused by large caps stocks.

Stovall is chief investment strategist for CFRA. He stated, “If the generals begin getting shot, it’s an indication that everybody is vulnerable. It seems as though, with tech down 2.5%, and interest rates higher than usual, there is still some downside potential.”

High rates can be a problem for growth companies and tech giants, as their valuations are heavily based upon future growth and cash flow. As interest rates rise, so does the future cash flow.

Oppenheimer’s technical analyst Ari Wald said that big tech stocks selling off could mean that large-cap growth stocks will join many others that have experienced big downturns.

The large cap hadn’t seen it, but now it has. He said that they see it as an indication of capitulation. Wald said he sees more downside for the S&P to about 4,230, the July low.

Stovall said it appears any correction will be contained and will not become a bear market. Stovall stated, “Unless our earnings and GDP forecasts, I don’t believe this is going to be beyond a correction.”