Stocks fell again this afternoon after opening flat on the day. The Dow, S&P, and Nasdaq Composite all tumbled in another intraday reversal, driven lower by inflation fears. Earnings season jitters were apparent as well.
“What I’m seeing is this inflection point where businesses are starting to become a bit more pessimistic about passing along higher input costs,” said LPL Financial chief economist Jeffrey Roach.
“If firms are having trouble managing input costs, that clearly translates into the squeezing of profit margins, so earnings will downshift from here.”
Ahead of earnings season is the June Consumer Price Index (CPI), which comes out tomorrow morning. Analysts believe that CPI climbed 8.8% year-over-year last month, up from May’s gain of 8.6%.
Anxiety over the CPI release caused big tech stocks, in particular, to slump into the close. Microsoft (NASDAQ: MSFT) got gouged for a 4.10% loss while Amazon (NASDAQ: AMZN) fell 2.26%.
Value shares did comparatively better than tech (ie, growth). And, according to one of my favorite charts, the tech selloff could easily continue.
In the chart above, we’ve divided the iShares Russell 1000 Growth ETF (NYSE: IWF) by the iShares Russell 1000 Value ETF (NYSE: IWD). When growth outperforms value, the chart goes up. The opposite happens when value outperforms growth.
It’s been a reliable tool for traders who want to target certain types of stocks. For example, the IWF/IWD has been climbing since June. That means growth stocks did better than value shares.
Now, though, the chart is showing a bearish breakout near the 10-day moving average (10-SMA). The minor bullish trend (yellow trendline) failed to hold. The last time this happened (late June), growth recovered and jumped above the 10-SMA.
But now it seems like it’s only a matter of time before one of these bearish setups triggers, sending the IWF/IWD plummeting. It shouldn’t come as too much of a surprise that when the Fed is raising rates, growth stocks will underperform.
Growth stocks, after all, want rates to remain low as they rely on debt to grow. The lower rates are, the cheaper that debt is.
Value stocks do much better with rising rates by comparison.
And if tomorrow’s CPI reading comes in hotter than expected, growth stocks should fall in response as it would provide evidence that the Fed needs to continue raising rates aggressively. The general market is already teetering on the edge of a bearish continuation, anyway. Market-leading tech names are looking very “shortable” as a result.
That includes Oracle Corp. (NYSE: ORCL), which fell today, closing below its minor bullish trend (yellow trendline) and the 10-SMA. ORCL also fell beneath 50-SMA, suggesting a longer-term downtrend is approaching.
That’s supported by ORCL’s recent lower high and lower low, both set within the last handful of weeks. The stochastic indicator suggests that ORCL has room to fall, too.
For those reasons, it might make sense to take ORCL short with a trade trigger of $69.37, below today’s low, as the general market gears up for tomorrow’s big CPI release.
