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Where To?

|Includes: AAPL, AMZN, GOOGL, NFLX, Technology Select Sector SPDR ETF (XLK)
Summary

We are in a mid-1990's/mid 2000's stage of our economy - entering later stages of cycle.

Is the risk/reward here in tech?

Falling correlations and yields.

After three days of our largest drops in the XLK (350 Billion in market cap) we have seen since the beginning of 2018, there are some questions investors should be asking themselves both ahead of Apple's earnings and as we enter a humdrum and generally slow market period in August.

First of all, Facebook and the FANG's in general have suffered recently. We are in an environment where meeting expectations or slightly beating just is not enough anymore. We did have parent company Alphabet report strong earnings, probably the best of the group. While Amazon surprised on margin growth, they slightly missed on revenue; the Street has been turning bearish on these slight misses, which makes sense considering the slightly astronomical P/E's we are trading at when looking at NFLX and AMZN.

We can say that it was an issue of too much optimism going into earnings surrounding tech, though this has not yet been dragging severely on other sectors. Morgan Stanley has already taken the lead advising clients to short big tech names and others will definitely follow suit. On the other hand we have analysts from Guggenheim saying this may just be a buy-the-dip opportunity. I think that rather than seeing a huge decline in the tech sector, this loss in value may be centered around the big names.

We are seeing a lot of divergence among the FANG's and lower correlations in the market as of late as well. Facebook and Netflix are leading this drop while Google leads and Amazon trails slightly behind. The divergence between value and growth/momentum may be changing the story on the street and leading to a decline to sentiment. Will investors be selling their positions, entering into defensive sectors, or buying more? Well this has a lot to do with market sentiment, which is currently in a toss-up. If markets are able to focus on the economy and earnings, we should be doing well in the remainder of 2018

As for the yield curve, an inversion is inevitable at some point during the market cycle. We can talk about financials here, asking which will be able to leverage growth and manage top-line growth. This past quarter's earnings seem to have centered around capital returns/buybacks which matches the capital acceleration in the S&P. Even with great bank earnings, we have an obsession with the potential inversion of the yield curve which the equity market seems to be more aware of than usual. For equities to begin rising again, we need market sentiment to rise, and trade is the largest policy risk markets have begun to price. Investors have become accustomed to these large returns and may turn to value to search for solid returns where the risk of growth is not as imminent.

We are still actively looking at trade with headlines moving markets more than they may have in the past. The diffusion of tensions with the EU provided a short burst of life to the equity market though was nailed back down with a 4.1 percent GDP growth which is believed by some to not be sustainable into the next half of the year because of a boost in soybean exports and an intense push to deliver goods prior to tariff deadlines being enforced. I have just heard of the breaking news about the US starting up talks with China once again which has boosted the S&P by a half percent into the open; this is somewhat surprising as we have not heard of any on-going talks. What the United States is asking of China is not attainable in my opinion, so while talking about talks may provide a short-term boost I do not believe the reaction in equities to be strong unless we receive some more news reaffirming a decrease of tensions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.