A feared continuation of the tech stock slide is already spooking global markets. The S&P passing on adding Tesla might be one reason premarket trading has been down, but I think that might just be part of continued downward pressure. I think the real pressure is coming from an obvious place: tech valuations are at unsustainable levels.
This kind of overbought conditions could lead to an 8-10% correction. You have seen a rotation taking shape toward cyclicals (and I feature one below), which I mentioned in last Friday’s newsletter, and that looks to continue today with material and financial sectors showing gains. Plus, the “three-day rule” might be in play.
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Something interesting in the sector that is hitting the news is SoftBank making massive bets on Big Tech. The Wall Street Journal and the Financial Times are both reporting that Masayoshi Son’s company has placed roughly $4 billion worth of options on Amazon, Microsoft, and Netflix. The exposure is an estimated $50 billion in calls. Supposedly the unrealized gains are in the $4 billion range…but this change in the company’s risk profile is concerning, to say the least. The stock is down 2% at the time of post.
Again, President Trump threatened to “decouple” from China. Is a new “cold war” taking place over 5G and other technology segments? Yes, there is an accelerating race to produce in these disruptive technologies, but can these two economies easily just split? No way.
One reason, and this may not be obvious to most, is that China is far behind in advanced technological components like processing chips and the machines that design them. It would take China 10 years to catch up to American chip makers. But, here is the catch. American technology production is dependent on China’s rare earth elements like cerium, europium, lanthanum, etc. China dominates production on these elements, accounting for 90% of the world’s supply.
Besides this dependence on rare earths, one of the biggest pain points in actually using any leverage against China is Apple. Yes, America’s technology darling has the most exposure to China and the company is the biggest lobbying force against ratcheting up tension with China. AAPL employs millions of Chinese and some of the company’s most dedicated end users reside in Mainland China.
In other news, Peloton announced a product refresh this morning and a price cut to its existing bike. The new Bike+ option is beefed up with rotating screens. PTON is up 213% over the last 53-weeks as many people continue to cut-up their gym memberships, and while this is not the new range of products many investors were hoping for, it is a move in the right direction.
Below you can find some of the most notable stocks to watch today.
