Updated: Jul 16, 2020
Technology and Telecom stocks have been rising sharply for the past year and many investors believe that it can sustain at this pace forever. Today, it appeared the strong rally in Tech/Telecom area would continue as the NASDAQ Composite Index (COMPQ) was up 2% earlier in the day before the selling started. By the end of the day, COMPQ declined 2.1%, while SPX finished off 0.9%, and INDU gained 0.04%. On the S&P sector front, selling was concentrated in the S&P Technology sector (XLK) as it felled 2.24% and in the Communication Services sector (XLC) as it lost 2.01%.
The NASDAQ and high-tech stocks have offered safety and visibility from the COVID-19 pandemic. So, what caused the sudden and sharp selling in Tech/Telecom stocks toward the close? Some blame today’s sell-off to California’s decision to shut down indoor facilities such as museums, movie theaters, restaurants, and bars as well as large cities such as Los Angeles and San Diego would move toward online education when the fall school year begins. Others believe traders locked in profits ahead of a volatile earnings season.
From a technical perspective, we suspect NASDAQ and the Tech/Telecom stocks reversed directions from all-time highs due to a combination of overbought conditions and traders looking to take some profits from the highfliers that have appreciated 30%-40% or more during the past three months.
The enclosed charts show key NASDAQ, Tech/Telecom sectors, and major technology-related names generating negative outside days. So, is this another buying opportunity, or could this end up being the worst of both worlds – collapsing Techs and declining cyclical stocks that lead to the start of a full-size market correction?
We recommend investors and traders alike monitor key supports coinciding with trendlines, pivotal prior breakouts, and major moving averages for guidance to the next major directional trends.