Nasdaq is off 2.7% since peaking a little more than a week ago
As tech shares continue to sell off, investors are focusing more on how that market-leading sector will dictate the direction of the broader benchmarks in the coming week as the Federal Reserve has signaled a commitment to tightening and economic data remain lackluster.
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On Friday, (http://www.marketwatch.com/story/us-stocks-set-to-fight-for-positive-ground-housing-data-ahead-2017-06-16) the Dow Jones Industrial Average closed at a record, notching weekly gains for a fourth straight week, while the S&P 500 index finished fractionally higher, and the Nasdaq Composite Index sank 0.9% for the week.
Tech stocks will remain a focus as their recent selloff has shown few signs of reversing following the Federal Reserve's rate hike and expectations of another one in September coupled with a paring of the Fed's $4.5 trillion balance sheet, said Bob Pavlik, chief investment strategist at Boston Private Wealth. How oil prices (http://www.marketwatch.com/story/oil-set-to-add-to-streak-of-weekly-losses-2017-06-16) test a $44 a barrel floor will also be a focus for the week, he said.
Since reaching a closing high of 6,321.76 on June 8, the Nasdaq has pulled back 2.7%, with shares of Netflix Inc.(NFLX) down 8.5% since then, shares of Apple Inc.(AAPL) falling 6.9%, shares of Amazon.com Inc. (AMZN) declining 4.6%, Alphabet Inc.(GOOGL) shares falling 4.4%, Facebook Inc.(FB) shares off 3.2%, and Microsoft Corp.(MSFT) shares shedding 2.9%.
Pavlik sees a risk-off trade going on with money from recent large-cap tech highfliers going into more defensive areas of the market. On the week, tech shares were the biggest losers on the S&P 500, finishing down 1.2%, while traditionally defensive utilities rose 1.4%.
He's concerned that the Fed is going on the belief that the economy is in a temporary slowdown, rather than one that may be more protracted.
"The rotation is coming out of these highfliers into more defensive areas because if they raise rates for a third time -- four rates hikes in nine months -- I'm not sure the economy can weather that right now," Pavlik said. "It makes me think that the Fed is seeing something that may not necessarily be there."
Read: Fed's Kashkari says he doesn't agree with Yellen that soft inflation is due to 'one-off' factors (http://www.marketwatch.com/story/feds-kashkari-says-he-didnt-agree-with-yellen-that-soft-inflation-is-due-to-one-off-factors-2017-06-16)
Pavlik pointed to a peak in the February Institute for Supply Management's manufacturing index that has drifted since (http://www.marketwatch.com/story/us-manufacturing-kept-strength-in-may-ism-survey-finds-2017-06-01) and stagnating growth in the ISM services index along with weak retail sales growth (http://www.marketwatch.com/story/us-retail-sales-in-may-are-weakest-in-16-months-2017-06-14), very few signs of inflation and with a downtrend in oil prices, as signs the economy may not be as strong to weather further tightening.
"They may get 2% [inflation] but I don't think it stays there, especially if oil breaks below $44 a barrel then you'll see prices in the 30s, so there goes your energy component," Pavlik said.
Plus, developments in the special counsel investigation (http://www.marketwatch.com/story/did-this-tweet-suggest-trump-could-fire-rosenstein-to-oust-mueller-2017-06-16) of Russian interference in the 2016 election and President Donald Trump and his advisers will likely remain on the forefront with a lack of economic data coming out.
"It's probably going to be a quiet week: A majority of economic reports have been disappointing, we're still a ways from earnings, Washington has created a panic exhaustion for investors, and I'm not expecting tech [movements] to spill into the broader market," said Randy Frederick, managing director of trading and derivatives at Schwab Center for Financial Research.
"I think we may see some modest profit-taking but that's not much of a worry," Frederick said.
As far as economic data go: May existing-home sales come out on Wednesday, May leading economic indicators are released Thursday, while the June Markit PMI flash and May new-home sales Friday come out Friday.
(END) Dow Jones Newswires
June 17, 2017 08:01 ET (12:01 GMT)