Investors have been dumping high-priced growth stocks, and many have been moving into lower-priced value stocks. Strategist Ed Yardeni has dubbed this phenomenon as an “internal correction.“
This is largely why the Nasdaq, which topped on March 5, has been underperforming the S&P 500 in recent weeks.
It’s unclear what has triggered this. But these unexplained sell-offs are not new.
Morgan Stanley’s Katy Huberty goes over some past instances when the Nasdaq laggesd the S&P (emphasis added):
The average tech market correction lasts two months. Nasdaq underperformed S&P 500 on 18 out of the last 26 trading days, shedding 7% since March 5th peak. We identified six other periods of similarly prolonged and significant underperformance in Nasdaq over the last 15 years (Exhibit 1). Two occurred post the dotcom bubble and the subprime mortgage crisis. While the tech sell- off during these periods are well understood, we note four other periods not related to macro volatility – July-September 2004, March- May 2005, May-August 2006, and November-December 2011. In 2004, it took 2 months for Nasdaq performance to normalize, in 2005 – 2 months, in 2006 – 3 months, and in 2011 – 1 month.
Like Huberty says, these divergences tend to normalize. This suggests you may be able to make money by betting on the spread between the Nasdaq and S&P 500 closing again.
The more mature large-cap tech stocks, which Huberty covers, have largely dodged this sell-off.
“We view Apple, HP, Seagate, and Western Digital as beneficiaries from the recent change in sentiment as investors seek exposure to value names in technology with downside protection and company specific catalysts,” she said. “We view the recent pullback in Cognisant as a buying opportunity as we see potential for upward guidance revision in May on the back of an uptick in discretionary spend.”
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