Facebook, Twitter and Intel Falter, S&P500 holds 2800

Last week was a potentially significant turning point for investors for several reasons, not the least of which was the historic collapse of Facebook followed in short order by an equally devastating meltdown (on a percentage basis) by Twitter (TWTR).

In the case of Facebook, Thursday’s collapse (-19%) was the most massive single stock capitalization meltdown on record – losing over 100 billion dollars. That historic collapse came on the heels of the release of quarterly earnings results. Earnings actually topped consensus estimates, but the revenue miss in conjunction with concern over decelerating growth combined to trigger investor panic. As a result, Facebook closed below its 50 and 200 DMAs.

In the case of Twitter, a similar theme emerged with the release of data that reflected a drop in active users – with more of the same on the horizon. On Friday, Twitter lost 20.54% or 8.82 points to close at $34.12. That closing price left Twitter below both its 50 and 200 DMAs as well.

Though not nearly as dramatic, large-cap tech behemoth, Intel, also posted a decidedly negative performance on Friday – losing 8.6%. Intel’s swoon on Friday came despite better-than-expected quarterly results and positive guidance. On June 1, Intel closed at $57.08. From June 1 to Friday’s close, Intel has lost 9.40 points or 16.46%.

Another large-cap darling, Netflix (NFLX), underperformed the Nasdaq Composite and broader market Friday, though less dramatically. On the day, Netflix lost 7.88 points or 2.17% – closing at $355.21. It closed below its 50 DMA for a seventh consecutive session. As recently as July 11th, Netflix closed at $418.65. In a matter of several weeks then, Netflix has lost 63.44 points or 15.15%. The reason for the recent weakness in Netflix shares has to do with a now common fear for investors, concern over growth. In Netflix’s most recent quarterly results just released, revenue missed but much more importantly, subscriber growth was well below consensus. Guidance in that regard reinforced investor concern.

Over the past several weeks, four of the leading companies in the Nasdaq Composite and tech vertical have all suffered meaningful pullbacks and all for the same reason – concern over growth. That concern will likely remain a significant factor for investors moving forward. Importantly, concern over growth is also combined with the realization that in nearly all these cases, a shift back to accelerating growth will involve both a significant uptick in investment and a potential shift in strategy – effectively providing for lower earnings per share expectations in coming quarters. A more draconian or cynical outlook on the part of some analysts and investors speaks to a future defined by past peak performance.

The sharp selloff in the large-cap issues outlined above, interestingly, only left the Nasdaq Composite a mere 2% off its all-time closing high. As the chart below indicates, both the 50 DMA and 200 DMA are in a rising uptrend. That will likely change this week as fallout from last week’s earnings-driven turmoil continues to reverberate through the tech sector.

However, even if we are seeing some moderation in the Nasdaq’s technical standing, the broader market has managed to remain constructive.

On Wednesday, the S&P 500 closed at 2846.04 – above the technically significant 2800 level I discussed last week. In spite of the reversion lower that was triggered by the weakness in the large-cap tech names outlined above, the S&P 500 still managed to close safely above the 2800 level on Friday – 2818.12. That resilience was due to earnings and guidance – both of which have remained constructive for investors. As if to underscore that broader market resilience, volume on the NYSE (-6.38%) and Nasdaq (-2.37%) both dropped on Friday indicating that though concerns over growth in the tech sector are being priced in, investors’ expectations for a solid earnings season remain intact.

As a counter-balance to the meltdowns exhibited last week by issues outlined above, on Thursday, Amazon (AMZN) reported its largest quarterly profit in history. Though marginally below consensus, revenue was $52.9 billion, up from $37.96 billion a year ago. Core retail business and improving ad revenue had particular impact on the quarterly results – which helped keep the Nasdaq Composite sell-off modest in the second half of last week.

We head into the second busiest week of earnings season with markets in remarkably solid shape. On Monday, we hear from Caterpillar (CAT). CAT’s results will be carefully looked at as a barometer of both global economic health and, very importantly, global trade. On Tuesday, American Tower (AMT) reports. AMT provides leadership results and insight into the REIT space. The significance of the current state of the REIT real estate landscape will be relevant for investors at this stage of our cycle – particularly with rising interest rates.

Flickr photo: Rosaura Ochoa
Kenny’s Commentary subscribers receive the note in their inbox Monday’s before the US markets open Subscribe