Friday, July 19th, 2024, saw another down day for the US stock market, capping off its worst week since April.  

All major indexes closed in the red, with the Dow Jones Industrial Average experiencing the steepest decline, dropping over 377 points, or 0.9%. The S&P 500 and Nasdaq followed suit, falling 0.7% and 0.8% respectively. 

Key Factors Driving the Market Down  

Tech Sector Weakness:  

The recent rally in Big Tech stocks seemed to be losing steam. Concerns about their valuations, particularly after some reached all-time highs earlier in the week, triggered some profit-taking by investors. 

Investors are rotating out of the tech heavyweights that have fuelled the recent rally and into small caps, seen by some as benefiting more from interest-rate cuts. 

Technology Outage:  

Adding fuel to the fire was a disruptive technology outage caused by a CrowdStrike update. This incident impacted businesses worldwide, raising concerns about potential cyber vulnerabilities and disrupting operations in various sectors. 

Upcoming Earnings Reports:  

With major tech earnings reports on the horizon, investors adopted a cautious approach, leading to increased volatility. These combined factors led to a risk-off sentiment, where investors preferred safer assets over equities. 

Weekly Performance  

For the week, the S&P fell 1.97%, the Nasdaq comp dropped 3.65% however the DOW rose 0.72%. 

Friday’s Closing Levels:

Market Insights 

Rotation Out of Tech: 

The rotation out of tech into non-tech continued from last week, surprising many as buyers on dips failed to defend the tech rally. It is worth noting that a weekly loss of 3.65% against a YTD rally of over 20% for tech is no cause for panic.  

Equity Fund Inflows: 

US equity funds absorbed about $45 billion — the fourth-largest inflow on record — in the week through Wednesday, according to a team led by Michael Hartnett, citing EPFR Global data. Small-cap funds had $9.9 billion of inflows, the second-largest ever, while large-cap funds received $27.4 billion. 

Hedge Fund Activity:  

A Bloomberg report cites Goldman Sachs Prime Brokerage Desk, noting that hedge funds are now underweight technology, media, and telecom by the most on record after spending two months unloading the best-performing stocks in the market. 

Their net leverage, often viewed as a barometer of risk appetite, fell to 54% in early July, the lowest level since January. This looks bearish but can also be a catalyst for another FOMO rally. 

Market Outlook  

Upcoming Earnings: 

Upcoming earning will be the test. If we get an indication that companies are adjusting their forecast downwards, it will be a tug of war between a Fed cut rally and recession selling. 

Potential Market Selloff: 

As mentioned in previous commentaries, the potential for a market selloff after a rate cut is highly probable, so I would be worried if earnings point to potential recession. 

Market Volatility:  

With many traders and investors on summer holidays, volatile markets are to be expected, so be prepared. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable US bank exceeding 20 years.   

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