The end of the third quarter showed evidence of window dressing (see “Stock Market: Ignore Last Week’s ‘Window Dressing’ – Look Ahead”). Technology stocks were beneficiaries, having performed well this year. Now that the quarter-end holding reports are set, those same stocks reversed, losing the short-term gains. Therefore, for now, we should treat any other explanations as uncertain, even doubtful.
Disclosure: Author holds U.S. stocks and U.S. stock funds. Individual stock holdings do not include any of the FAANG stocks.
Two pictures of window dressing with tech stocks
A good way to see last quarter’s window dressing is to examine the favored five, FAANG stocks (Facebook, Apple, Amazon, Netflix and Google/Alphabet).
This graph shows the performance of the five stocks and the Nasdaq Composite Index. The period is the final week of last quarter and the first week of this quarter, plus today (Monday, 10/8). Note that, first, the five outperformed the Nasdaq (except for Facebook, which ran into negative news). This quarter they have lost the outperformance, except for Apple.
This next graph shows the performance of the FAANG stocks relative to the general market (as measured by the SP 500). The view exhibits the same outperformance and underperformance pattern, with the net result about flat, except for Apple.
Two takeaways from the pictures, above
First, there is no special message from tech stocks’ underperformance this quarter. Likely, it is simply a reversal of the previous week’s run-up.
Second, the recent drop is not a “buy-on-the-dip” opportunity. Rather, the stocks are back to their valuation levels of two+ weeks ago.
Then, there is an added observation to make:
Earnings reports are coming soon. How the companies, themselves, have performed and what management says about their outlooks (particularly for 2019) should drive stock performance from here. Below are the dates (all reports are after the market close):
- Netflix – Oct. 16
- Amazon.com – Oct. 25
- Alphabet (Google) – Oct. 25
- Facebook – Oct. 30
- Apple – Nov. 1
The bottom line
Technology stocks’ recent declines are unremarkable because they mostly match the window-dressing rises in the days before. Therefore, we can consider the up and down moves as volatility, signifying little as we move into the important period ahead: earnings reports.