Social Media Stocks - Momentum Tech Names Sell Off Again

Social Media Stocks - My point that Amazon was overbought on Tuesday has been proven correct as the stock is down 3.98% in the past 2 days. It fell 1.83% on Thursday.

It was one of many momentum internet names which declined. Apple stock fell 1.66% in anticipation of a potentially higher priced new iPhone which will be launched this month.

Usually the stock rallies before the announcement and declines afterwards. The good news for Apple is the iPhone X had the best resale value out of any smartphone; it lost only 32% of its value after one year.

The next closest device that isn’t made by Apple is the Samsung Galaxy S8 which lost 58% of its resale value after one year.

Micron stock was down 9.9%. The company said at a Citigroup conference that the price of NAND chips, which are flash memory chips used in USB drives and smaller devices, fell in the third quarter.

Besides the semiconductors (SOXX ETF) which had a 2.65% decline on Thursday, the social media stocks had the worst decline in tech.

Social Media Stocks -As you can see from the chart below, the social media ETF was down 1.53% on Thursday. 

The ETF is at a 10 month  low and has been dramatically underperforming the S&P 500. Snap stock fell 3.07% to an all-time low. It’s tough to buy the dip in this name because daily active users are falling and the firm isn’t profitable yet.

Twitter stock was down 5.87%. It is down 14.15% since August 27th and 34.11% since June 14th. I think the stock is a buy.

It is profitable and has been shipping great advancements such as bookmarks and the ability to filter out spam accounts.

Finally, Facebook stock has been cratering as it fell 2.78% on Thursday. It’s down 25.27% since its peak on July 25th. It’s down 10.41% year to date.

I keep saying Facebook will need to explain the new trends in costs and user growth in its next conference call, but investors aren’t giving Facebook a chance to do that as they are selling it every chance they can.

There has been a major sentiment shift in the stock in the past few weeks as the headline risks are combining with fears of increased costs to create the perfect storm. I think Facebook is a buy at these levels.

Social Media Stocks -Modest Selloff

While tech has corrected this week, the overall market hasn’t done poorly as this has been a sector rotation not a correction.

The S&P 500 was down 0.37%; it is only down 1.2% from its record high. The Nasdaq fell 0.91%. Even the overall tech sector isn’t doing that poorly as it is down 2.56% from its record high.

The selling has been focused on the momentum names as the boring companies like General Mills, which was up 3.2% on Thursday, get their time in the sun. The Russell 2000 was down 0.76% and the VIX was up 5.32% to 14.65.

Energy was the worst sector as it fell 1.93%. The best sectors were utilities and telecom which were up 0.39% and 0.73%. WTI oil fell 1.4% to $67.77 because stocks at Cushing, Oklahoma rose 549,000 according to the EIA.

Social Media Stocks -Treasury Market

The 10 year yield fell 3 basis points to 2.87% and the 2 year yield fell 1 basis point to 2.64% meaning the difference between the two yields is now 23 basis points.

Stabilization of the 2 year yield is an early sign that the Fed is nearing the end of its hike cycle. As you can see from the chart below, the Fed funds future market projects there will only be 3 more quarter point hikes this cycle. This is lower than the Fed dot plot which expects 6 more hikes.

Fed dot plot is out of line with reality because the yield curve will invert in the next few months. The Fed won’t be raising rates in 2020. Because there is a 69% chance of at least 2 rate hikes by the end of the year and I think 2 will occur.

I’m expecting the curve to come close to inverting by the end of the year.

Social Media Stocks -Weakening Markit PMI

The August Markit PMI was 54.8 which missed estimates for 55.2 and was below the July report of 56. New orders fell to an 8 month low and backlogs fell the second month in a row.

There is spare capacity which is new as growth had been strong in the first half. Hiring fell to a 7 month low and output fell to a 4 month low. The good news is input costs and selling price growth moderated.

Moderating inflation combined with tougher comparisons will drive year over year inflation below the Fed’s target by the end of the year. Therefore, it doesn’t make sense for the Fed to project that there will be 6 more hikes this cycle.

When you combine this report with the manufacturing PMI, the composite PMI fell from 55.7 to 54.7.

According to the commentary at the end of the Markit report, the PMI is consistent with just under 3% GDP growth in Q3 and non-farm payroll increases of just under 200,000 jobs per month.

The GDP estimate isn’t far off, but I expect it to come in slightly higher than that because of inventory investment. The hiring in this report is at an 8 month low, so I’d think that would imply closer to 100,000 jobs added.

Social Media Stocks -Conclusion

Generally, sector rotations take a few days to play out. I am not anticipating a rebound in the semiconductor names because they are cyclical. I am anticipating a rebound in Facebook, Twitter, and Amazon because they are long term winners because of their competitive advantages.

Facebook is facing relentless public scrutiny. It will take a few quarters to fix this, but let’s not forget Instagram’s advancement into retail sales within the app which should generate big growth for the company.

It’s a long term winner facing short term noise.