Before The Bell - The U.S. equity market produced another split session in the middle day of the so far bifurcated trading week. The Dow Jones Industrials and the small-cap Russell 2000 finished slightly lower, while the NASDAQ and the S&P 500 Index held nice gains at the closing bell. With little major news other than the recent elections and thoughts about what impact the results will have on the market going forward, there has not been a lot of market-moving reports this week with earnings season slowing down and the economic calendar light. This is in stark contrast to the previous week, which had no shortage of headlines, with the election results, earnings, the latest data on employment, and the Federal Reserve’s monetary policy decision providing much fodder for investors.

What we have seen so this week is some major sector rotation in play. Yesterday, the NASDAQ Composite rebounded sharply from earlier week heavy selling, with traders’ bargain hunting, if you can call it that in technology space where valuations are still quite frothy. There was some rotation back into the big tech names that took a hit over the first two days of trading this week. Yesterday’s rally in the technology, consumer (both discretionary and staples) spaces, as well as in the recently out-of-favor higher-yielding groups came at the expense of the commodities (i.e., basic materials and energy) and healthcare groups. Up until yesterday, the higher-yielding equity areas have been hurt by more desire for riskier assets since last week’s elections and the recent spike in fixed-income yields. Higher bond yields make them more attractive options for those investors seeking income.

The rotation into the technology stocks yesterday may have also been driven by worries about escalating COVID-19 cases across the nation. If we have learned anything from the performance of the U.S. equity market since the coronavirus outbreak stateside in March, is that when fears about the virus spreading and additional lockdowns increase, the technology names seem to be desirable holdings. The sector, given the proliferation of cloud computing and social media, is seen has being somewhat coronavirus proof. Both allow many workers and students to continue their tasks with minor interruptions and inconveniences. Not surprisingly, some of the cloud participants, including tech behemoth Microsoft (MSFT), rallied in the last 24 hours.

During yesterday session, the coronavirus worries intensified some when reports surfaced that Governor Andrew Cuomo of New York announced new restrictions on businesses and social events on Staten Island and imposed a 10:00 P.M. curfew on restaurants, bars, and gyms statewide in response to a significant uptick in coronavirus infections. The governor also announced a new 10-person cap on parties and other gatherings in private residences, including apartments and houses. Overall, new cases per day are currently rising in 49 states.
Looking forward, if the number of coronavirus cases continues to spike, the investment community is going face a tough decision about whether it is prudent to add more technology names to their portfolios. The positives include the reasons cited above, but is that enough to add more names at the recent lofty valuations. One recommendation may be to give the companies with cloud computing businesses and cloud-related products and services a closer look, as well as the social media giants, as they may be among the best performers in an environment where COVID-19 concerns are again on the rise. Our respective coverage of the Computer and the Internet Industries are available to subscribers in Issue 7 and Issue 13 of The Value Line Investment Survey, which can be found on valueline.com. 

Meantime, this morning we received the latest data on initial weekly jobless claims, which came in a bit better than expected at 709,000; the expectation called for 731,000 new weekly claims. The question moving forward will be if the aforementioned new COVID-19 cases and the selective social-distancing orders that we are seeing in many parts of the nation will have a detrimental impact on the labor market in the coming weeks and months. Today’s report was overall encouraging, but will that continue is the question pundits have begun to ask.

Before the market’s open, the equity futures are indicating that we may be in for another mixed trading session on Wall Street, with the main theme continuing to be sector rotation. The underlying undertone to trading, though, is looking bearish. So far overseas, the mood has been just that, as the main indexes in Asia, save for Japan’s Nikkei 225, finished modestly lower overnight, while the major European bourses are in the red as trading moves into the second half of the session on the Continent. Stay tuned.  – William G. Ferguson

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.