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FLASH CRASH: How to Play Big Tech’s Sudden Drop

The summer trading months can be painfully boring.

That means we have the freedom to abandon the comforting glare of our computer monitors and hit the beach without missing any important market events.

But not today.

A little volatility is sneaking back into the picture. The market’s starting to get exciting again! And it’s all thanks to a brand-new tech wreck

Wall Street’s big tech darlings have finally found some sellers. Friday afternoon was a FAANG bloodbath. Facebook, Amazon, Apple, Netflix and Google each fell by more than 3% by the afternoon bell. The tech bulls are finally rattled.

The market gods also treated us to a nasty flash crash that sent Amazon stock reeling. Shares dipped below $930 for less than a second during an apparent fat-finger trade. The stock recovered almost immediately, posting a loss of a little more than 3% by the end of the trading day…

“Yes, in the grand scheme of things, it’s not a huge move for a stock that recently cracked $1,000 per share,” Business Insider notes, “but oscillating by almost $35 per share in the space of 3 seconds is quite a move no matter what the stock is.”

By the end of the day, the carnage had spread. Big tech weakness dragged down the Nasdaq Composite, which fell by 1.8%. After posting a new all-time high in the early morning hours, the tech-heavy index posted its sharpest turnaround since February 16, MarketWatch notes.

Just one week ago, we told you how the Nasdaq Composite had rocketed to year-to-date gains north of 17% thanks to the seemingly unstoppable tech rally. Compare that to a gain of 9% for the S&P 500. It’s not even close.

But we also took note of some new trends bubbling up from the market’s forgotten depths – including a stealth small-cap rally.

“If last week’s fledgling trends persist, it could be time for this winner-take-all market to share some of its spoils,” we wrote on June 5th. “What we’re seeing could be the start of some good ol’ fashioned market rotation.”

Once again, the market’s subtle hints have prepared us for a move that blindsided most investors. Big tech’s mammoth gains and the market’s notable lack of volatility lulled many investors to sleep. Friday’s jolt was a slap in the face. It’s a painful reminder that stocks can’t rocket higher every single day without encountering some pullbacks and corrections along the way…

Of course, it’s all too easy to view this big tech beat-down as a scary and potentially bearish event for the entire market.

Don’t fall into this trap!

Up until Friday, 2017 has been all about the big tech stocks – and nothing else. Even factoring in Friday’s swoon, Facebook, Amazon, and Apple are still sitting on year-to-date gains of 30%. No matter which way you slice it, these stocks aren’t in trouble yet. Long-term shareholders certainly aren’t scared.

Remember, a healthy bull market is like a relay race. When market leading industries and sectors become overextended, traders will move on to the next hot group of stocks. That’s what’s happening right now. Financials and small-caps are getting some love while the biggest winners of the year endure some downside action. Nothing wrong with that…

Once again, timing is everything. One week ago, we recommended taking partial profits on your Amazon.com (NASDAQ:AMZN) and Facebook (NASDAQ:FB) positions. I don’t think either of these stocks is in big trouble after one bad trading day. Now that you’ve had the chance to book partial profits, hang onto the rest of your shares.

After booking big-tech profits, we also suggested taking some fresh cash and jumping on the small-cap bandwagon. The market has already rewarded your quick thinking. We were able to successfully pivot to trades that have the best shot at leading the market during the third quarter.

We’re running a lean trading portfolio now. A strong first half of the year allows us to remain patient and wait for only the best opportunities to pull consistent, double-digit gains out of the market. No need for us to take any hacks at underwhelming setups – especially now that we’re finally seeing some interesting market rotation.

Don’t fall into any emotional traps this week. No one knows if a bigger tech correction is coming or if this is just a short-term setback. We’ll readjust if necessary…


Greg Guenthner
for The Daily Reckoning

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Greg Guenthner

Greg Guenthner, CMT, is the editor of Opening Bell Fortunes and Seven Figure Signals. He has been with Agora Financial/Seven Figure Publishing since 2005. In 2019, the average position in Greg’s Sunrise Fortunes portfolio outperformed the S&P 500 by 1.65x.

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