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Tech stocks, coming off records highs, tumble for a second day

Adam Shell
USA TODAY

Technology stocks, which had been the market's best performers this year,  had a second straight day of losses on Monday.

In this Sept. 16, 2016 file photo, Lisa Gao compares a new jet black iPhone 7, right, with her iPhone 6 at the Apple Store in Chicago.  (AP Photo/Kiichiro Sato)

The sharp, sudden decline in tech shares has caught the attention of Wall Street, as stocks like Facebook, Apple, Netflix, Amazon and Google parent Alphabet had been leading the U.S. stock market higher. These so-called "FAANG" stocks are also among the most widely owned by professional investors. Fund managers have been "doubling down" on tech, and now have a "record" amount of cash in the sector — which Wall Street dubs an "overweight" — relative to other sectors, according to Bank of America Merrill Lynch data.

So any signs of weakness in these popular investments raises red flags. Wall Street pros, however, say it's premature to say the recent "tech wreck" marks a complete about-face for the tech sector's fortunes.

The two-day swoon doesn't mean these dominant tech players are losing their positions of power in their respective niches, ranging from social media to mobile phones. What it does show, however, is that these popular stocks can go down as quickly as they go up. And that no stock can stay on top of the Wall Street performance charts forever.

Professional investors may be starting to worry that this latest group of tech titans may be starting to "plateau," says tech fund manager Kevin Landis, chief investment officer at Firsthand Funds. "Investors are having pangs of doubt."

But success "stories" like the FAANG stocks, he stresses, do not "fall apart overnight." The Apples and Facebooks of the world didn't become the next Kodak or Xerox "over the weekend," says Landis, referring to old tech stalwarts that were eventually overtaken by younger tech disrupters.

That doesn't mean these hot stocks, many were up more than 30% for the year, won't suffer more losses before stabilizing, says Ed Campbell, managing director for QMA, a business unit of Prudential. "I wouldn't say the run is over, but the shakeout is just starting and could cause a 10% drop in the tech sector. You could see 15% drops in FAANG names," he says.

Leading the decline Monday was Apple, which suffered a ratings downgrade from Mizuho Securities, its second such downgrade in the past week.

Apple shares, which suffered their biggest loss of the year Friday when they tumbled nearly 4%, fell another 2.5% Monday to $145.32. Today's drop follows Mizuho cutting its rating on Apple to "neutral" from "buy" and cutting its price target to $150 from $160.

The two-day tech selloff, however, follows big gains. The tech-packed Nasdaq composite, for example, had been up 17.4% before Friday's selloff, which was double the return of the broad Standard & Poor's 500 stock index. And the "FAANG" stocks were up nearly 30% through the end of May, compared with a gain of 8% for the S&P 500, BofA data show. All the FAANG stocks fell 3% or more Friday and they all finished lower Monday, with Netflix the biggest loser with a drop of 4.2%.

The decline has raised questions as to whether tech's big run is over, and whether it will drag down the broader market.

"It felt like someone took a pin and popped the balloon," said Gary Kaltbaum, president of Kaltbaum Capital Management, referring to Friday's tech downdraft.

It is too early, said Kaltbaum, to determine if the recent tech weakness will spell trouble for the broader U.S. stock market, which hasn't suffered a 10%-plus drop since early 2016.

"Often, when the big leaders top out it is bad for the market," he said. "But I'm not so sure right now. The jury is still out."

One good sign for the overall market, at least so far, is that the pain in the tech sector hasn't really spread to other areas. On Friday, for example, the blue-chip Dow Jones industrial average rallied to a new closing high, as did the small-company Russell 2000 stock index.

Similarly, in early trading Monday, the Nasdaq had pared its steep loss of 1.6% to close down 0.5%, while the Dow and S&P 500 closed modestly lower.

Today's tech sector is nowhere near as expensive as it was back in 2000, during the dot-com bubble, BofA data show. While tech is trading at 19 times earnings, its highest level since 2010, "it is still low relative to history," BofA notes.

While money is coming out of tech stocks that have performed well and have gotten expensive relative to earnings, the money is not leaving the market. Instead, it is moving to other areas deemed as offering more value, such as financial and energy shares, says Jack Ablin, chief investment officer at BMO Private Bank.

Friday's selloff was sparked, in part, due to a cautious research note from Goldman Sachs. The note argued that investors were treating tech stocks more like defensive companies that sell everyday staples like toilet paper and soda. Goldman's fear was that treating tech like less volatile names would draw more money into the sector, making it vulnerable to price declines if those money flows start to "reverse."

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