Putting too much faith in the U.S. stock market’s direction over its first few hours is proving to be a mistake.
Case in point Tuesday, when gains fueled by Alphabet Inc.’s earnings faded four hours into the session. By about 1:30 p.m. in New York, the Nasdaq Composite Index had erased a gain of 1.1 percent. Among the biggest contributors to the retreat were Microsoft Corp., Netflix Inc. and Tesla Inc.
But a bigger culprit in Tuesday’s decline was smaller companies. To wit, the Nasdaq 100, an index dominated by tech giants like Apple and Amazon, remained up 0.3 percent, while its equal weight version, which strips out market-value biases and gives as much sway to the smallest companies, was down 0.4 percent.
“Small-caps is a sector that’s driven by expectations about strong growth,” Peter Jankovskis, co-chief investment officer at Oakbrook Investments, said by phone.“Some mega-cap names delivered that growth and some of the investors may have decided to switch over today.”
Gauges of mid- and small-cap stocks compiled by S&P were falling by between 0.9 percent and 1.1 percent. The Russell Microcap Index fell 1 percent.
Turnarounds like today’s have become a common feature for U.S. equities in July, though previous ones were in the other direction. After opening lower, stocks staged notable reversals on July 23, July 17 and July 2.
A catalyst in the fall, according to chart watchers, may have been the Cboe Volatility Index’s decline to the lowest intraday levels in almost two weeks. The VIX touched short-term support of 11.66, sending a signal the U.S. stocks have become overbought, according to Donald Selkin, a New York-based chief market strategist at Newbridge Securities Corp.
“The market got internally too overbought on the highs, and today’s rally earlier in the session was a signal the market was becoming overbought and unsustainable at current levels,” said Selkin said by phone. “Tech was where most of the gains happened earlier in the session, some investors thought the rally has gone too far.”
Netflix retreated 2 percent for the biggest loss among the FAANG group of tech megacaps. Google’s parent Alphabet, which soared as much as 5.3 percent, the most in almost nine months, pared gains to 3.5 percent at 1:58 p.m. in New York. Amazon.com Inc. rose 0.8 percent after advancing as much as 2.1 percent earlier in the session.
The VIX Index rose 1.4 percent to 12.80, while the Chicago Board Options Exchange NDX Volatility Index rose 4.6 percent to 17.25.
Among groups showing losses were cyber security companies Zscaler Inc. and Okta Inc., cloud software maker Splunk Inc. and chip and chip equipment companies Advanced Micro Devices and ASML Holding NV. Hasbro Inc., which had its stock downgraded at Monness, Crespi, Hardt & Co, fell 4.7 percent, the biggest loss in the Nasdaq 100 Index.
Energy and Canada
Oil prices rose on Tuesday as the market shifted focus to the possibility of increased Chinese demand, drawing attention away from trade tensions between that country and the United States after a series of tariffs imposed by both countries.
Brent crude was up 57 cents at $73.63 a barrel. U.S. West Texas Intermediate (WTI) was up 86 cents at $68.75. The rally helped provide support to the TSX index.
Reports on Tuesday that China will increase infrastructure spending helped lessen fears that U.S.-China trade tensions will reduce the country’s demand for oil, said Phil Flynn, analyst at Price Futures Group in Chicago.
“That’s going to be very bullish for oil demand,” Flynn said. “Infrastructure spending from China in the past had really jacked up oil demand, and I think that’s adding some outside support for prices.”
In addition, after an 8-per-cent decline from multi-year highs, Gene McGillian, vice president of market research at Tradition Energy in Stamford, Connecticut, said buyers are coming back into the market.
With significant reductions in crude inventories because of strong global demand growth, the supply-and-demand picture will remain strong unless there are significant production increases from Russia and Saudi Arabia, McGillian said.
Both crude oil benchmarks have fallen this month as crude supplies from Russia, Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries have increased and some unscheduled production losses have eased.
Market sentiment has been driven by fears that supply could be disrupted by confrontation in the Middle East or that Washington’s trade dispute with its major trading partners could dampen global growth.
Iran, OPEC’s third-largest producer, which pumps 3.75 million barrels a day, has come under increasing U.S. pressure, with the administration of President Donald Trump pushing countries to cut all imports of Iranian oil beginning in November.
Saudi Arabia and other large producers are ramping up output to offset losses likely to come as the November deadline approaches.
Reuters, Bloomberg News