Opinion: Tech pullback or seasonal pause? What the market is signaling

Richard Baker

One of my best friends lives on the coast of North Carolina, and I’m worried about him as Hurricane Erin approaches the East Coast. He’s been through a few hurricane seasons and isn’t surprised by them because they are predictable, just like the current market turbulence we are seeing. Like my buddy, we shouldn’t be shocked, just prepared.

The S&P 500 has been trading down on the heels of the Nasdaq index, which continues to slide, putting more downside pressure on investors to pause on tech stocks. These trends are sparking conversations about whether this could be a market peak. Should traders be concerned – or is this just a seasonal trend?

On Tuesday, Aug. 19, the Nasdaq Composite, the U.S. stock market's main technology index, had its biggest loss in weeks. The main driver was some big drops in single-name stocks, such as Palantir, which fell more than 9%, but also chipmakers like Nvidia and AMD, which took substantial losses.

This comes amid what has been a pretty quiet summer for markets. The first few weeks of August tend to be quieter for stocks, as Congress is on recess and traders tend to take vacation, leading to lower-than-normal trading volumes compared to other months. Those lower trading volumes can really intensify negative market moves and have an overly negative impact on indexes.

U.S. large-cap indexes are still at all-time highs; however, small-cap indexes are not. Current market conditions are more challenging for mid- to small-cap stocks, which is something I’m keeping an eye on. The main indexes show positive growth, driven by a few large stocks, but this makes it more challenging to create a diversified portfolio.

Historically, the last few days of August and the month of September are typically volatile months for the S&P 500. A review of the VIX, the market's “fear index,” over the last 15 years confirms this is usually a volatile time of year. However, so far this month, the VIX has bucked that trend and is staying low. This could mean that part of the recent tech-selling pressure may be regular seasonal activity.

So, is this just a seasonal trend or should traders be concerned? Probably both.

The conditions seem ripe for a short-term pullback: depressed volatility, stretched positioning/sentiment, and a time of year that is known for surprises. Long-term investors may have an opportunity to buy the dip. An opportunity might present itself in the next few weeks to add some commodities, bonds and real estate in addition to your traditional stock positions. Adding this layer of diversification could perform well when more conventional parts of the market struggle.

For the past few years, the market has been led by large-cap U.S. equities, but that won’t last forever. There are times when the market tailwinds turn into headwinds, and when they do, I plan to take advantage of this opportunity in the accounts I manage.

My buddy in North Carolina expects to be fine, though he may have to deal with some crazy wind. He’s smart and pays attention to the storm warnings, even when the sky looks clear. A current calm doesn’t mean turbulence won’t come; it just means the people who ignore the warnings won’t be prepared when it does.

Richard Baker, an accredited investment fiduciary, is the founder and executive wealth adviser at Fervent Wealth Management LLC in Springfield. He can be reached at richard@ferventwm.com.