The broad market indexes sold off strongly from the beginning of the session as the Institute for Supply Management's Purchasing Managers' Index (PMI) report came in surprisingly lower than expected. So low, in fact, that the index hasn't had a reading like it in over a decade. It has only appeared in recessionary times. The news seemed to send investors heading for the exits as markets closed 1% lower or more. Yet this may simply be the workings of a sector rotation.
This level of decline is far from a panic-like behavior, and there may even exist a silver lining in this cloudy news. Perhaps it isn't so strange that industrial sector stocks fell harder than technology sector stocks. The impetus for the sell-off was news about the manufacturing sector, after all; however, technology stocks tend to lead industrial stocks in the direction of new trends. For bullish investors, this is a hopeful sign. At least for a little while. If investors remain spooked by current news events, it won't be long before technology stocks lead the charge lower.
The Winners in the Tech Sector
Within the tech sector, as you might expect, not all stocks are performing as strongly as the market or the rest of the sector in general. It's worth looking into the sector to determine which stocks are actually propping up the index.
The chart below compares several stocks to the Industrial Select Sector SPDR Fund (XLI). These stocks are among the top 10 largest holdings in the index. The three that have outperformed the index over the past several months include Apple Inc. (AAPL), Mastercard Incorporated (MA), and Microsoft Corporation (MSFT). The underperformers include Adobe Inc. (ADBE), Cisco Systems, Inc. (CSCO), and salesforce.com, inc. (CRM). Among these, a key bellwether may be Microsoft.
Did Microsoft Just Break its Bullish Trend Line?
The price action for shares of Microsoft stock shows a multi-month upward trend that has just kept moving higher. At least until now. The price drop today was significant enough to close outside of its statistical trend.
The chart below shows a regression trend for 2019, with today's action falling and closing outside this mathematical marker. This may signal that the stock is unusually inexpensive on a relative basis. If so, investors will likely buy it from this current level in the near future. However, when stocks break a trendline, specifically in a way that shows weakness going into the break, it often signals the beginning of a new downward trend to come.
The Bottom Line
U.S. stock indexes fell after the PMI index report came in drastically lower than expected. Industrial stocks unsurprisingly led the way, giving hope to investors that this may simply be an overreaction of sorts. Within the tech sector, Microsoft may be the one to watch as an indicator of whether the technology sector, and the markets in general, are about to begin a downward trend.
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