Nasdaq 100 fell heavily by 2.2%, while small cap stock index Russell 2000 surged by 3.6%. The divergence trend between the two is the biggest since January 2021. In fact, Thursday's trend was foreshadowed. Goldman Sachs mentioned that previously, US technology stocks continued to rise, but "smart money" hedge funds reduced their positions. Some analysts believe that Thursday's trend will not form a trend, but it highlights that the market is looking for different trades, not just long positions in large technology stocks.
Data released on Thursday showed that US inflation in June cooled more than expected, with overall CPI growth rate turning negative for the first time in four years on a month-on-month basis, and core CPI growth rate hitting a new three-year low on a year-on-year basis. Market expectations for a rate cut by the Federal Reserve have significantly increased, with the probability of a rate cut in September rising to 80%, and the probability of a rate cut in July reappearing.
Bullish US inflation news stirs pre-market trading, with all three major futures indices rising collectively. NASDAQ futures rose 0.26%, S&P 500 futures rose 0.17%, and DOW futures rose 0.12%. When the US stock market opened at 9:30 am Eastern Time, although the three major stock indices initially rose, their gains narrowed compared to pre-market trading. NASDAQ rose 0.06% at the beginning of the trading day, S&P 500 rose 0.03%, and DOW rose 0.07%.
About 10 minutes after opening, the previously strong NASDAQ 100 and S&P 500 indices turned downward, and continued to fall throughout the day, with NASDAQ 100 closing down about 2.2%. "The Magnificent Seven" took a beating, with NVIDIA leading the way, followed by Tesla, which took a big hit due to the postponed launch of RoboTaxi, leading the way for "The Magnificent Seven".
Tesla ultimately closed down 8.44%, putting an end to its 11-day upward trend, and NVIDIA closed down more than 5.5%, with Meta down more than 4.1%, Google A down 2.9%, Microsoft down 2.5%, and Amazon and Apple down more than 2.3%.
Overall, in response to such bullish US inflation data, large technology stocks showed a trend of "selling on the news" on the same day.
At the same time, the DOW was volatile, ending up slightly. The Russell 2000 small-cap index saw its intraday gain expand, ending up 3.6%, its best single-day performance since November 2023. In addition, Chinese concept stocks also performed quite strongly, with the NASDAQ Golden Dragon China index up more than 2%.
The performance of large technology stocks and small-cap stocks on Thursday highlighted their extremely divergent trends. Thursday was the worst relative performance of the NASDAQ 100 index vs. the Russell 2000 index since January 2021. It is worth noting that some analysts have pointed out that this has occurred at a significant fundamental price difference level, and every time the market-to-sales ratio of the NASDAQ is 4.5 higher than that of the Russell 2000, bad things happen.
In fact, the trend on Thursday had been predicted. Vincent Lin, a trader at Goldman Sachs, had previously pointed out that since mid-May, some major portfolio changes had been occurring behind the scenes. While technology stocks in the US stock market continued to rise sharply on the back of the development of artificial intelligence infrastructure, and greatly outperformed the broader market, hedge funds seemed to be reducing their exposure to the industry.
Although the weight of information technology shares in major US stock market indices has continued to rise, reaching its highest level in years, data from Goldman Sachs Prime shows that its clients' net allocations to technology stocks peaked at the end of May and have been falling in the past few weeks.
As a result, hedge funds are now significantly underweight technology stocks relative to broader market indices, by as much as 13 points, the lowest level in years.
The long/short ratio of information technology stocks reached a peak of 2.13 in early May, and has since fallen to 1.89, indicating that investors are more cautious.
From the standpoint of Goldman Sachs Prime data on capital flows, the information technology sector was the name most sold nominally in June, and continues to be the most sold since July.
Hedge funds have been net sellers of information technology stocks for 16 of the past 19 trading days, driven mainly by long sellers, with a small number of shorts also shorting the stocks.
Goldman Sachs Asset Management said this week that small-cap stocks in the US will rebound in the second half of 2024, and their valuations are attractive to investors looking to expand beyond large-cap stocks. Small-cap stocks can provide a way to gain higher growth potential from future middle- and large-cap leaders in more areas, and the certainty around interest rate cuts will also boost small-cap stocks.
However, Morgan Stanley has a different view. Led by strategist Michael Wilson, they claim that as the US election approaches, the market is considering the scenario of Republicans winning, and investors should focus on quality stocks, which usually have more stable returns, stronger balance sheets, and higher gross margins, while avoiding small-cap cyclical stocks.
Alexander Morris, CEO of F/m Investment, recently stated that people are using this opportunity to say that now is a good time to re-evaluate whether we should only allocate funds to Hershey. He does not believe that Thursday's trend will form any trend, but it highlights that the market is looking for some different trades, not just long the seven giants or overall long large technology stocks.
Editor/Somer