Tech Stocks Torture Traders

In medieval times, a little torture device called a thumbscrew was widely used to extract confessions from prisoners.

The implement was usually nothing more than a simple vice clamped to a victim’s fingers or toes, “sometimes lined with sharp metal points to puncture the thumbs and inflict greater pain in the nail beds,” Wikipedia concisely explains.

Of course, your local police department probably won’t smash your thumbs over an unpaid parking ticket these days. But if you still yearn to feel a crushing pain in your extremities, you can always fire up your favorite finance site and watch tech stocks implode this week…

High-momentum tech stocks accelerated their earnings season slump Monday, dragging some of the market’s most popular plays deep into the red. The tech-heavy Nasdaq coughed up more than 100 points to finish the day lower by more than 1.4%. Meanwhile, the FANG carnage continued as Netflix led the drop with a loss of almost 6% on the day. The group is now down a painful 9% since Facebook’s earnings fiasco last week, Bloomberg notes.

But if you really want to feel the toe-smashing effects of the quick selloff, look no further than the BMO REX Microsectors FANG 3x Leveraged ETN (FNGU). Yes, that’s 3x leveraged. After dropping more than 8% yesterday, poor FNGU is down a cool 25% over the past four trading sessions. Ouch!

Fang flops

Early Monday morning, I noted the market was heading into a potentially volatile August as bulls and bears fight for control. The action is kicking off early as we wrap up July trading today. So far, momentum and tech names are the main victims. We’ll have to wait to see if the selling spreads to other stocks and sectors.

With all the political and market-related noise clouding our view these days, you might not even remember that this drop isn’t even FANG’s first faceplant of the summer. We just witnessed some tortuous FANG carnage in late June when Netflix (again) led the tech darlings lower with a 6% slide.

At the time, I noted it was normal to see hard resets in strong names like Netflix. After all, the stock was still up triple-digits on the year. The market’s most important job is to keep investors honest. Traders can’t expect to book outsized gains in momentum stocks without having to endure a little pain along the way.

The same holds true for the corrections we’re seeing in these stocks heading into the new trading month. Yes, some of the tech carnage has been swift and brutal. But we certainly haven’t seen any outright panic just yet.

If we look beyond the damage inflicted to the Nasdaq, we can find some green on our screens. Last week, I showed you how the Dow Jones Industrial Average was actually outperforming the Nasdaq Composite during the month of July. The Nasdaq boasted a commanding lead until tech earnings started to spook speculators. That’s when the Dow surged ahead.

Despite closing in the red yesterday, the Dow continues to widen its gap over the Nasdaq as the trading month ends. Drug companies are leading the blue chips early this week, with Merck & Co. (NYSE:MRK) jumping more than 2% to new all-time highs. So it should come as no surprise to see your Johnson & Johnson (NYSE:JNJ) comeback play streaking to four-month highs as well.

Will traders ditch their red-hot tech shares and finally pivot to the forgotten blue chips as August trading approaches? If this new trend continues, you’re well positioned to take advantage of the rotation…

Sincerely,

Greg Guenthner

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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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