"It's Time To Get Defensive": Morgan Stanley Downgrades Tech Stocks To Sell

Last weekend, when discussing why the trade war with China has now lapsed into what it called a "vicious cycle" that can only end with a market drop, Morgan Stanley wrote that it expects further fallout from trade wars, and warned that among the various ways traders can position for escalation, is to ease on exposure to the tech sector which it predicted "is vulnerable as a sector where pricing has been insensitive to trade risks so far."

Now, in the latest note from Morgan Stanley's Michael Wilson, the chief equity strategist starts off my comparing the market with the recent volatility in the weather, writing that "the summer moved into full swing this past week in the United States with one of the steamiest July 4th’s I can remember" and resulting in "popup thunderstorms that have been epic lately, dropping as much as five inches of rain in just ten minutes near my house on Tuesday afternoon."

This reminds me of how markets have traded so far this year – unannounced storms that do a lot of localized damage over a very short span but end almost as quickly as they arrive.

Extending the weather metaphor, Wilson then picks up on a trope he has been discussing all year, namely the idea of "rolling bear markets" in which one specific asset class is slammed even as the rest of the market remains surprisingly stable. For context he brings up the vol shock in early February and the sharp sell-off in Italian BTPs in May which "stand out as perhaps the best examples of what investors have had to deal with this year."

Amazingly, neither of these events led to a broader, more systemic de-risking of portfolios. Instead, prices reset quickly in the affected assets and investors simply moved to higher ground.

To Wilson, this kind of price action is very much in line with his outlook for 2018: "a year in which tighter financial conditions drain liquidity, leading to the weakest links getting hit first and hardest."

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Alexa Graham 1 year ago Member's comment

Aren't a lot of these companies already banned from doing business in China?

Bruce Powers 1 year ago Member's comment

Scary! You should add #Micron to the list. China just banned their chips in retaliation for #Trump's #tariffs. Half of $MU's sales are to China: