According to Morgan Stanley’s top US equity strategist, the rationale behind tech stocks’ correction must keep rising

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  • The tech sell-off is unlikely to be over yet, according to Mike Wilson, Morgan Stanley’s chief US equity strategist.
  • In a note on Sunday, Wilson stressed that the bull market in stocks will continue to lead with value and cyclicals as the forerunner rather than the technology sector.
  • Tech stocks will continue to lag behind for three main reasons, Wilson said.
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The rapid decline in technology stocks last month is likely to result in further downward moves, Mike Wilson, Morgan Stanley’s chief US equity strategist, said in a recent customer statement.

Since its peak on February 16, the Nasdaq 100 has declined more than 10% despite a steady stream of good news hit investors. Vaccinations for COVID-19 continue to rise, daily COVID-19 cases have collapsed since the peak in January, and Congress is about to pass a $ 1.9 trillion stimulus package.

But with a full economic reopening within reach and a surge in interest rates, investors are moving from high-growth technology stocks to valuable and cyclical stocks that can benefit from consumers finally getting out of their homes and spending a year of rolling lockdowns. The recent trend of high-growth technology stocks lagging behind its value creation counterparts is likely to continue as Wilson sees more downturns in the tech sector for these three reasons, according to the note.

1. “Markets run the Fed, not the other way around.”

“The nonlinear movement in 10-year returns has put investors at risk they believed was unlikely, if not impossible. The stock market now knows that 10-year return is a ‘wrong’ rate that it either isn’t or cannot be won. ” To do this, the Fed added $ 180 billion to its balance sheet in February, 50% more than its target. Still, rates went up, “said Wilson.

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2. “The rotation could accelerate even further.”

“By the end of this month there will be a big shift in the top and bottom quintiles of 12 month price momentum. Most of the stocks that go in the top quintile are value and cyclical stocks. Conversely, many of the stocks from the top move Quintile are tech and other high growth stocks.
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“Some of the growth-to-value rotation is due to better relative fundamentals as the economy recovers and cheaper valuations. However, if those value stocks move into the top quintile of price momentum and growth stocks migrate, the rotation could accelerate be quite disruptive to portfolios and lead to another round of deleveraging like in January. “

3. “The Nasdaq 100 should test its 200-day moving average.”

“Due to the technical damage to date, the Nasdaq 100 appears to have completed a head-and-shoulders top and should test its 200-day moving average,” said Wilson.

The Nasdaq 100’s 200-day moving average is currently at 11,635, a potential downward trend of 10% from Friday’s close.

A head and shoulders pattern is a bearish directional pattern that often signals a reversal after an uptrend. The pattern takes its shape from a series of three peaks, the second peak being the highest of the three. A cutout represents a support and is formed by connecting the bottoms connected to the tips. When the stock falls below its cutout, a sell signal is triggered for traders.

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