S&P500 and Nasdaq: Market Rotation Shakes Tech Giants as Small-Caps Surge

Market Rotation Defines Wall Street’s Week

The U.S. stock market experienced a notable shift this week, with a clear rotation away from tech giants towards small-caps and blue-chips. This change in investor sentiment has reshaped the performance landscape across major indices, signaling a potential recalibration of market factors.

At 12:19 GMT, Dow Futures are trading 40884.00, down 74.00 or -0.18%. S&P 500 Index Futures are trading 5600.00, up 5.50 or +0.10% and Nasdaq 100 Index Futures are trading 19931.50, up 32.25 or +0.16%.

Index Performance

The S&P 500 is down 1.26% for the week, its worst performance since April, reflecting broad market pressures. The tech-heavy Nasdaq Composite has fallen 2.87%, jeopardizing its impressive six-week winning streak. In contrast, the Dow Jones Industrial Average has gained 1.66%, showcasing the resilience of traditional blue-chip stocks. The Russell 2000, representing small-cap stocks, has climbed 2.33%, indicating renewed interest in smaller, potentially undervalued companies.

Tech Sector Stumbles

CrowdStrike’s shares plummeted over 12% following a major product update-related outage affecting IT systems worldwide. This incident rippled through the tech sector, with Microsoft sliding more than 1% due to issues with its Azure and Microsoft 365 products. However, competitors like Palo Alto and Fortinet saw gains of over 2% and 1% respectively, suggesting potential market share shifts in the cybersecurity space.

Financial Services Mixed

American Express reported mixed results, with revenue falling short of expectations at $16.33 billion, while earnings per share exceeded forecasts at $3.49. The company’s stock retreated more than 2%, despite a strong 33% gain year-to-date, highlighting the market’s high expectations for the financial services sector.

Streaming Giants Under Pressure

Netflix provided weak third-quarter revenue guidance of $9.73 billion, below the $9.82 billion analyst consensus. However, historical patterns suggest the company often outperforms its initial forecasts. Netflix also announced plans to phase out its ad-free basic plan in the U.S. and France, signaling a stronger push towards its advertising model and potentially reshaping its revenue structure.

Market Forecast

The current market rotation appears to have staying power, according to Chris Verrone of Strategas. He noted that while headline numbers show declines in momentum stocks, market breadth has been “absolutely spectacular” over the past two weeks. This shift towards small-caps and away from mega-cap tech stocks could persist, potentially offering new opportunities for traders in previously overlooked sectors.

As the week concludes, investors will also be monitoring political developments, with the Republican National Convention wrapping up and increasing pressure on President Biden from within the Democratic party. These factors may introduce additional volatility as the market digests both economic and political variables in the coming weeks.

Technical Analysis

E-mini Nasdaq-100 Index futures are lower shortly before the cash market opening with prices hovering just above a minor pivot at 19742.25 and the major 50-day moving average at 19610.16.

Trader reaction to the 19742.25 to 19610.16 retracement zone will determine the direction of the index on Friday.

A sustained move over 19742.25 will indicate the presence of  buyers. This could fuel an intraday short-covering rally.

A sustained move under 19610.16 will signal the presence of sellers. This could lead to an even steeper decline with 19178.375 the next major target.