Luke Lango sees a summer rally coming for the tech sector… economic data show the recovery slowing, and why that’s good for tech… 20 tech plays from John Jagerson and Wade Hansen
Yesterday, we saw the 10-Year Treasury yield plunge to 1.25%.
Meanwhile, stocks turned roughly 1% lower as fears about slowing economic growth and European inflation gripped investors.
But if you’re thinking the Wall Street party is over, hold on…
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Our hypergrowth investing expert, Luke Lango, believes these falling yields and market wobbles are setting up a summer rally for growth/tech stocks.
Here’s more from Luke:
This dynamic of falling yields and falling stocks leading to a growth stock breakout has happened over a dozen times over the past five years.
This time is no different.
With the 10-year yield stuck in a free-fall and dropping below 1.4%, growth stocks look very compelling on this dip.
***Plunging yields and lower prices make growth stocks look attractive
For newer Digest readers, Luke is our hypergrowth expert, and the analyst behind Exponential Growth Report. His specialty is finding market-leading tech innovators that are pioneering explosive trends, leading to huge returns for investors.
Earlier this week, in Luke’s Daily Notes to subscribers, he put the plummeting Treasury yields into perspective:
We’ve seen this rodeo before many times.
Every time stocks and yields drop concurrent to one another, what comes next is a huge rebound in growth stocks because lower yields provide a basis for multiple expansion in growth stocks.
Quick refresher: The value of a stock theoretically equals the net present value of a company’s future cash flows plus what the company’s balance sheet says the company is worth today.
The lower yields go, the lower the discount rate investors use to discount those future cash flows, and the higher the present value of future cash flows.
Growth stocks derive all their value from those future cash flows. Thus, the lower the yields go, the higher growth stocks go.
It’s that simple.
***The data support the reality that the recovery is slowing, which supports lower yields
As two illustrations, Luke points toward the Markit Services Purchasing Managers’ Index (PMI) report from earlier this week, and the ISM Services Index.
To make sure we’re all on the same page, the PMI reflects a panel of more than 400 private sector companies. It tracks things such as sales, employment, inventories, and prices.
A reading above 50 indicates that the services sector is expanding, with below 50 suggesting a decline.
Meanwhile, the ISM Services Index is a similar measure of expansion or contraction, a bit like a barometer on the health of the services sector.
Back to Luke:
The Markit Services PMI came in at 64.6, below expectations for a 65.2 reading and lower than last month’s 64.8 reading.
Meanwhile, the ISM Services Index for June clocked in at 60.1, below expectations for a 63.3 reading and sharply lower than the May reading of 64.0.
Clearly, the U.S. economic recovery continues to slow – and it will keep slowing for the foreseeable future.
On top of this, yesterday, we received news that weekly jobless claims unexpectedly rose to 373,000 last week, shooting beyond the expected 350,000. It’s yet another sign of the labor market’s uneven recovery.
Now, these data reflect what’s going on with the U.S. economy at this moment. But is there anything resembling a crystal ball that might suggest what’s going to happen over the coming months?
It turns out, yes – and that crystal ball is China.
***What China can show us about where we’re going
As Luke points out to readers, China was one of the first countries to lock down because of the Covid-19 pandemic. It was also one of the first ones to reopen.
Given this, it can be seen as somewhat of a “leading indicator” for how this unusual global economic reopening will play out.
So, what’s happening in China?
Here’s Luke:
Things are slowing quite dramatically.
The Caixin China General Services Business Activity Index fell to 50.3 in June, from 55.1 the previous month and the lowest reading in 14 months. Of note: A number above 50 indicates economic expansion, so China’s services sector barely grew in June.
If we take China as a leading indicator for how the rest of the global economic reopening will play out – which, so far, it’s been a good leading indicator – then we can conclude that, indeed, economic activity throughout the global will continue to slow in the coming months.
That will lead to a continued downtrend in bond yields, and a continued uptrend in growth stocks.
So, all-in-all, it’s good news for growth/tech investors, despite yesterday’s market weakness.
Now, that said, growth/tech is a big sector. Where has the money been flowing inside this sector? And what does it mean for how traders are feeling about risk today?
For those answers, let’s turn to our technical experts from Strategic Trader, John Jagerson and Wade Hansen.
***Tech traders want to have their cake and eat it too
For newer readers, John and Wade are the analysts behind Strategic Trader. This is InvestorPlace’s premier trading service, combining options, insightful technical and fundamental analysis, and market history to trade the markets in all sorts of conditions.
In their update on Wednesday, John and Wade dug into what professional traders are doing with their tech allocations today. In short, it’s all about maximizing return while minimizing risk.
From the update:
Historically, small-cap stocks – stocks with a market capitalization of less than $2 billion – have been the go-to investment for investors who are looking to maximize their reward potential when the future looks promising.
Small-cap stocks are attractive potential high-reward investments because it is typically easier for a smaller company to achieve higher percentage growth than it is for a larger company.
Large-cap stocks – stocks with a market capitalization of more than $10 billion – on the other hand, have been the go-to investment for investors who are looking to reduce their risk when the future looks less bright.
Large-cap stocks are attractive potential low-risk investments because larger companies are more established and can typically weather economic hardships easier than smaller companies.
***Where traders are positioning themselves along this risk/reward, small-cap/large-cap continuum
John and Wade tell us that traders are carving out a “best-of-both-worlds” position by buying small large-cap stocks.
Back to their update:
In our update two weeks ago, we showed you how the Technology sector has been outperforming all other sectors since May 12th.
Drilling down, you will find 70 Technology stocks in the S&P 500. Of those, 17 have a market cap larger than $100 billion. The remaining 53 have a market cap smaller than $100 billion.
Interestingly, out of the top-20 performing stocks for 2021 in the Technology sector, only 5 of them – NVIDIA, Applied Materials, Intuit, Oracle and Microsoft – have a market cap larger than $100 billion.
The other 15 are smaller, with many of them having market caps below $50 billion.
Here are those 15:
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Fortinet
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Gartner
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DXC Technology
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Zebra Technologies
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Seagate
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CDW
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NortonLifeLock
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Lam Research
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Motorola
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Arista Networks
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NXP Semiconductor
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Western Digital
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Skyworks
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Trimble
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NetApp
But before we get too bullish on tech, do John and Wade see any reason to pause based on the fireworks in the Treasury market and yesterday’s volatility?
In short, no. They write that declines like yesterday’s are always a little frustrating, but they don’t see any evidence that this is a long-term issue.
So, hang in there through volatility. Top-tier tech/growth stocks are headed higher.
We’ll give the last word to John and Wade:
We are firm believers in riding the current trend until something happens to shift momentum. Earnings season starts in earnest next week with the JPMorgan Chase (JPM) announcement on July 13th, before market open. Until then, let’s keep riding this bullish wave in Tech.
Have a good evening,
Jeff Remsburg
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