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Stocks Soar as Tech Regains its Mojo

By John Persinos on April 3, 2018

Investors increasingly think that President Trump’s tough talk on trade is just bluster and he won’t follow through. That appeared to be the consensus today on the financial TV gabfests. That’s a dangerous assumption, but it was enough to help the markets regain upward momentum.

The main indices all closed higher today, following a brutal pounding on Monday. The technology sector provided a tailwind, with the Technology Select Sector SPDR Fund (XLK) gaining 1.00%. E-commerce giant Amazon (NSDQ: AMZN), beaten down Monday by President Trump’s twitter taunts, recovered today and rose 1.46%.

Trading earlier in the day was choppy, as stocks struggled to hang onto gains. The major indices opened strong in the morning, but then stocks started to wobble as headlines carried more news of presidential pique and geopolitical risk. The indices finally shook off these worries and ended in positive territory.

Dangers lurk beneath the surface. I disdain the perpetual Cassandras in our business. If you had listened to them, you would have missed the second greatest bull market in history. But you shouldn’t delude yourself, either. The tax cut bill signed in December gave traders a “sugar high” that masked many problems that will eventually come around to haunt Wall Street.

We’re overdue for a recession; valuations are still excessive and out of whack with earnings prospects; Russia, North Korea and China remain belligerent to American interests; U.S. foreign policy has taken an extremely hawkish turn; interest rates are rising… the list goes on.

The 10% correction that we’ve witnessed this year took some froth out of the market. That’s a good thing. Corrections are a normal part of the cycle. But we’re not out of the woods. First quarter earnings reports will hold the key. Analyst expectations as a whole are positive.

One factor propping up this market has been index investing, which is governed by algorithms. All of that 401(k) and Individual Retirement Account money is baked into the markets. Therein lies the risk. Algorithmic trading works fine during good times, but it can accelerate downward movements until they morph into a full-blown contagion.

Meanwhile, the world’s two largest economies exchanging hostile words remains a precarious situation. As history has shown, brinkmanship can easily lead to war. Not just a trade war, but a shooting one.

China makes a move…

On Tuesday, China’s ambassador to Washington vowed that China would retaliate tit-for-tat if the U.S. implements additional tariffs on Chinese goods.

The envoy’s warning came ahead of the White House’s expected announcement this week of U.S. tariffs on $50 billion to $60 billion in Chinese imports.

Brewing trade tensions won’t suddenly go away. Additional concerns include widening cracks in the technology sector and a recent breach below a major S&P 500 technical level.

The S&P 500 on Monday tumbled below its 200-day moving average, a key long-term trend line. The good news is that the S&P today rose above that level.

From its peak on January 26 to the closing bell today, the S&P 500 has fallen about 10%, which officially puts the index into correction territory. I’ve been warning about a stock market correction since the middle of 2017. Sure, my warnings came early. But no one can precisely time these events.

If you had heeded my advice, you’d be in a stronger position right now. Before the carnage of February and March, I consistently told readers to take the following actions:

Elevate cash levels; pare back exposure to momentum stocks (especially to large-cap tech equities, such as the “FAANGs”); increase exposure to hedges and bonds; pocket at least partial gains from your biggest winners; and use “stop loss” orders.

During the stock market swoon of the past two months, readers have asked me whether the correction is over. My answer: not by a long shot. My advice on portfolio calibration still stands.

“Headline risk” continues to cast a pall over Wall Street. President Trump merely has to fire off an impulsive tweet to immediately wipe out (at least temporarily) billions of dollars in a company’s market valuation. To trigger a market meltdown, North Korean President Kim Jong-un merely has to fire off a rocket, even if it only lands in the sea.

Amazon shares plunged on Monday not because of business fundamentals. It was because Trump wants to hurt Amazon CEO Jeff Bezos for owning The Washington Post, which has been critical of Trump.

Amazon bounced back Tuesday, as financial logic prevailed. The battered FAANG coterie all ended in the green today. But don’t think you can indiscriminately pile back into tech growth stocks.

Facebook’s (NSDQ: FB) CEO Mark Zuckerberg appears before Congress on April 10, to address the firm’s data privacy scandal. The event is likely to be a media circus, providing yet another object lesson in headline risk.

Tuesday Market Wrap

  • DJIA: +1.65% or +389.17 points to close at 24,033.36
  • S&P 500: +1.26% or +32.57 points to close at 2,614.45
  • Nasdaq: +1.04% or +71.16 points to close at 6,941.28

Tuesday’s Big Gainers

Biotech launches collaborative effort with peers for cancer research.

Analysts bullish on education provider.

Music streaming service launches successful IPO.

Tuesday’s Big Decliners

Biotech’s new drug prospect flunks clinical study.

Data center operator issues weak guidance.

Recent merger hits speed bumps.

Letters to the Editor

“What’s your view of high dividend stocks under today’s risky conditions?” — Jason M.

In perilous times like these, one of the best defensive strategies is to choose companies with strong and rising dividends.

Dividend-paying stocks are proven tools for long-term wealth building, but they’re also safe harbors in rough seas because companies with robust and rising dividends also by definition sport the strongest fundamentals.

If a company has strong enough cash flow (and sufficiently low debt) to generate high and growing dividends, it also means that the balance sheet is inherently solid enough to sustain the company through the sort of risks and challenges we’re witnessing today.

Want advice on how to protect your portfolio from today’s dangers? Send me a question: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

 


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I hope you’ve enjoyed the phenomenal bull market of the past eight years…

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Do nothing and suffer the agony of watching the profits you’ve accumulated over the years evaporate right before your eyes…

Or reposition your portfolio and invest in companies which prosper as inflation rises and interest rates soar.

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