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Cyclical/value stocks torpedoed but medium-term uptrend remains intact

US big tech stocks continued to hog the limelight yesterday, outperforming for the fourth consecutive session after Netflix, one of the FAANG stocks, skyrocketed 17% on 20 January after a positive reaction to its earnings announcement.

The S&P 500 and Nasdaq 100, which are heavily weighted towards big tech, managed to post more all-time record high closing levels,, at 3855 (+0.36%) and 13,483 (+0.87%) respectively, despite seeing some selling pressure mid-session. Cyclicals, value and small-caps took a breather again yesterday, with the Dow Jones Industrial Average shedding a minor loss of -0.12% together with the Russell 2000 (-0.25%).

The underperformance of cyclicals, value and small-caps stocks as seen from the S&P sectors; energy (-1.06%), financials (-0.76%), industrials (-0.69%), and materials (-0.54%) came on the backdrop of a negative news flow rather than any disappointing earnings results announcements. It was reported that US president Joe Biden’s $1.9 trillion proposed stimulus deal had faced bipartisan resistance and could be pushed back to mid-March rather that getting fast-track approval in Congress. The latter was an observation from Senate Majority Leader Schumer.

Due to this fiscal stimulus pessimism news flow, the US Treasury 10-year yield shed 7 basis points to 1.03%, its steepest drop seen since 13 January. Despite the continued drop seen in the US Treasury 10-year yield in the last four days, the US dollar has continued to hold steadily against the major currencies. The US Dollar index inched higher by +0.17% from last Friday, to close at 90.23 and continues to shape a series of higher lows from the 6 January low of 89.20. From a technical analysis perspective, it is likely that we may continue to see more US dollar strength that can last for the next two days, with key medium-term resistance at 91.20/40 as the US Federal Reserve monetary policy decision outcome looms on 27 January (3am, 28 January, with the Fed chair press conference at 3.30am, Singapore time).

In summary, even though we have witnessed the outperformance of US big tech stocks over cyclical, value and small caps theme plays in the past four days, it is more related to short-term herding behaviour and the momentum factor that drives up these stocks ahead of earnings announcements (Microsoft on 26 January; Apple and Facebook on 27 January) after their share prices have lagged behind since September 2020. From a longer-term perspective, it is still too early to say it's game over for cyclicals, value and small caps stocks after we have witnessed a significant outperformance and rotation into such theme play in the second half of 2020, that spilled over to the first two weeks of January 2021.

From a technical analysis point of view, the medium-term uptrend remains intact for the S&P sectors of financials, materials, industrials and energy, as their respective price action continues to hover around an upward sloping 50-day moving average. Also, as the Biden administration are now pushing for more concrete plans to roll out a faster pace of vaccination programme and with more fiscal stimulus packages in the pipeline, the cyclical/recovery story is likely to be back in vogue again after these earnings announcements are over. Bear in mind as well, a Democrat-controlled Congress tends to be more hawkish towards anti-trust measures against the current oligopolistic business practices adopted by US big tech firms, hence such negative vibes may materialise again in the next few months, to create a negative feedback loop into big tech share prices.

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