The sell-off in big cap growth and tech may not be just a quick washout in high-priced names.
It could be a reset for the stock market.
Nasdaq and the high-flying stocks that have powered the market higher have been under pressure for the past two sessions, as investors switch out of names like Amazon, Zoom and Facebook and move into stocks in the industrial, energy and materials sectors.
"The stock market is two stock markets. You have tech and everything else. Everything else is finally getting their day," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "Tech and the whole work from home world is a whole different place today [following] that Pfizer news. The use of Zoom is not going to be that prevalent if you go back to the office. I think this is real and this could be the end of the growth dominance of the market in this cycle."
Pfizer said Monday that it has a vaccine that is more than 90% successful in preventing Covid-19, and it could be broadly available next year. A vaccine would help the economy return to normal, and people would again be comfortable gathering in public, traveling and going into offices, schools and retail stores.
"I think this is going to have some legs and will persist well into next year," said QMA chief investment strategist Ed Keon of the rotation.
"It's hard to say for sure, but I think this is the beginning of a reset, not that there won't be moves back towards the stocks that have been working," said Keon. "I think we might be moving toward a more balanced market. If things go smoothly and a vaccine is available, I think you'll see things that got beaten up by the pandemic will return to more normal prices and more normal earnings. The things that got boosted by the pandemic will return to earth."
Binky Chadha, chief U.S. equity and global strategist at Deutsche Bank said he's been neutral on Nasdaq big tech for awhile. "Positive news on the vaccine should not be about the market going up or down," he said. "The market is fully priced for 60 ISM which is what we got. All I'm saying was the market was fully priced for a very rapid, much more rapid economic recovery." The ISM manufacturing report for October came in at 59.3, the highest level since September, 2018.
"There are a lot of good reasons for optimism here with respect to the economy. Just as in 2020, people said the stock market is different than the economy, and the stock market was going up... now it can be in reverse," said Boockvar. "The economy may be better next year, and the stock market may not rally."
The bifurcated trading drove the Dow higher, up 0.9%, but hit Nasdaq, down 1.3%. The S&P 500 was flat, but the small cap Russell 2000 was up almost 2%.
Scott Redler, partner with T3Live.com, said it's difficult to say how deep the sell-off in growth will go. "Typically, so far this year there's been two or three bouts of this. Where it's only been two down days for tech... usually it repairs and becomes fine again," said Redler. "That's the question. Is this time different? It's hard to tell. Tech has enjoyed multiple years of outperformance and gains."
Redler, who follows short term technicals, said the damage done this week to the charts of tech and growth names is worse than some of the prior moves.
Redler said he is watching Apple for leadership for tech, and on Tuesday afternoon it was moving higher. "Tech lost momentum and is bending. You can't say it's broken yet , but it's definitely vulnerable," he said. Redler said the market can't go up that much without tech participating.
"Now tech is actually a headwind and it needs to find a level where it can base, so it doesn't remain a headwind...Two days don't make a trend, but if you're overweight a sector, it can hurt you," said Redler.
Stocks like Microsoft, Tesla, Alphabet all traded lower, but names like Caterpillar, Boeing and Honeywell all moved higher.
"These are all great companies but valuations may not be able to sustain themselves," said Boockvar. He said the market is trading at about 22 times earnings, but the big tech names are all trading at over 30 times or more trailing earnings .
Amazon is trading at about 89 times trailing earnings, while Zoom was at more than 500 times trailing earnings but 150 times fiscal 2021 earnings.
Julian Emanuel, head of equity and derivatives trading at BTIG, said he is cautious on the market, particularly Nasdaq names.
"The combination of political uncertainty and the virus leaves us cautious on further near-term market gains, yet resolutely optimistic long-term," Emanuel wrote. Because of Nasdaq's divergence, Emanuel is recommending investors protect gains by buying puts on the QQQ ETF, which represents the Nasdaq 100.
Emanuel also said the economy is at risk of "scarring," a concern mentioned by Fed Chairman Jerome Powell.
"Given the virus' parabolic increase – 10M total U.S. cases, the 5-day average over 100K – coordinated national public health policy, including stimulus, likely needs urgent implementation prior to 1/20/21 to avoid a 4Q/1Q recession," Emanuel wrote.
He said it's possible the election uncertainty, combined with the vaccine news and better economic reports, like Friday's jobs report, could result in inaction from Congress. Joe Biden has been declared president-elect, but President Donald Trump claims he won and his campaign is contesting the counts in several states.
UBS Global Wealth Management told clients to diversify into the cyclical areas of the market.
"The market reaction underlines our recent message that investors need to diversify for the next leg of the rally, toward more cyclical parts of the market that have lagged behind in 2020, and away from big tech and the primary stay-at-home beneficiaries," wrote Chief Investment Officer Mark Haefele. "We have said that the next leg up in stocks would be driven by an end to US political uncertainty and sustainable mobility gains backed by a vaccine. Developments in the past week support our view."