An employee works on the assembly line for semiconductor testers. (Photographer: Tomohiro Ohsumi/Bloomberg)

Eleven Weeks of Bliss Shattered for Stock Market's Hottest Trade

(Bloomberg) -- It’s tough luck for semiconductor bulls that during a stretch in which one of their favorite things, bitcoin, surged to $11,000, the industry took its worst stock market beating in 23 months.

Chipmakers, whose 43 percent surge before Monday made them the best-performing group in the S&P 500, were summarily ousted from that throne as steady selling sent them down more than 5 percent on the week. Standard bearers Nvidia Corp. and Applied Materials Inc. slumped at least 8.9 percent, while Micron Technology Inc. lost 15.

Blame it on the rotation, as headlines on Donald Trump’s tax plan combined with concern about memory-chip prices to crush semiconductors during a week when transportation stocks, banks and phone companies jumped. Gains in groups seen as beneficiaries of the president’s polices sent the S&P 500 up 1.5 percent for the week, even as political turmoil on Friday triggered the index’s biggest intraday selloff in almost seven months.

Pain in tech wasn’t limited to chips as the storied FANG block dropped 3.5 percent and saw more market value lost in one day -- $60 billion on Wednesday -- in more than five years. Five-day losses totaled 4.2 percent in Facebook Inc., 2.2 percent in Apple Inc., 4.6 percent in Netflix Inc. and 3 percent in Google parent Alphabet Inc. The S&P Semiconductor Equipment Index lost 10 percent this week, the most since 2009.

Eleven Weeks of Bliss Shattered for Stock Market's Hottest Trade

“In between earnings seasons is probably a good time to take profits after a phenomenal rally,” said Phil Orlando, chief equity strategist at Federated Investors. “The pair trade of taking some profits in tech and going long on undervalued financial companies seems reasonable.”

Technology firms took lumps Wednesday as investors reasoned tax cuts will mean little to software companies that have some of the lowest effective rates. Speculation that financial firms will benefit the most, coupled with signs the president’s Federal Reserve nominee will go light on banking regulation, triggered the biggest five-day advance in the sector in more than a year.

The S&P 500 Index added 1.5 percent in the five days, finishing at 2,642.22. The gains came on Tuesday and Thursday amid a simultaneous advance in the Cboe Volatility Index, which widened its five-day increase to 18 percent. The Nasdaq 100 slid 1.1 percent, the most in 12 weeks, while the FANG cohort slumped the most in five months.

A 6.2 percent slump in the Philadelphia Semiconductor index broke its record streak of 11 weekly gains.

“The few times the market’s actually gone down the last couple years, it has not been the FANG stocks leading it on the way,” Brian Frank, portfolio manager at Key Biscayne, Florida-based Frank Capital Partners LLC, said by phone. “I’m not calling the top or anything, but it’s a change. It’s something different. It’s a glimmer of hope for a value investor.”

Tech hardware and chip firms have been the biggest gainers among industry groups this year, partly helped by an almost 10-fold rally in bitcoin, which increases demand for the computing power used to verify bitcoin transactions. Stocks like Nvidia have been riding the cryptocurrency wave, advancing 85 percent this year, more than twice as much as the broader semiconductors index. Nvidia and Advanced Micro Devices’ cryptocurrency related demand, which currently accounts for an estimated 6 and 10 percent of revenues respectively, will be “much less meaningful” next year, Vijay Rakesh, an analyst at Mizuho Securities, Vijay Rakesh, an analyst at Mizuho Securities, said in a note this week.

Eleven Weeks of Bliss Shattered for Stock Market's Hottest Trade

Uncertainty about the future of the tax reform eased amid news the Republicans have the necessary votes to pass tax cuts. That optimism helped minimize a Friday’s drop in the S&P 500 of as much as 1.6 percent after former national security adviser Michael Flynn pleaded guilty to lying to federal agents. Stocks ended the session 0.2 percent lower but the political turmoil still tested investors’ nerves, who got used to one of the calmest markets in history, sending the volatility gauge up as much as 29 percent.

Transportation companies, banks and telecommunication firms were the clear winners this week, rallying at least 5.8 percent amid optimism lower taxes will fuel economic growth. This week’s rotation into the sectors related to Trump’s growth agenda out of the group of technology stocks added to concern about the lack of the market’s pullback from record highs. The S&P 500 has gone 12 months without a retreat of 3 percent from a peak, the most on record.

“The rotation out of tech and chipmakers to banks and telecoms isn’t that surprising,” said Ian Winer, director of equities at Wedbush Securities Inc. “We have seen this a few times, but what is still surprising to market participants -- myself included -- is that you have sectors falling five percent or more and the S&P 500 still trades essentially flat.”

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