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Smart money will not hop on big tech stocks right now: Expert

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Heritage Capital President and CIO Paul Schatz joins Yahoo Finance’s Kristin Myers to break down his outlook on the markets, as tech drags stocks lower for a third straight day.

Video Transcript

KRISTIN MYERS: First, I wanted to ask you how bad right now? Do you think the sell off is going to get, and you talked about how this week was very important, so what do you think we're going to be seeing this week?

PAUL SCHATZ: Good to see you again. So first, the seeds of this decline were sown starting in the middle of July. That's when the markets started to see little cracks in its foundation. We started to see sentiment go from neutral to giddy to outright greedy. When it came to Apple and Tesla, all you heard was about their one-way stocks, they could only go up.

You don't get it, you don't understand, stock, which is so great for the stock, and then blah, blah, blah. That's typical, kind of, late cycle greedy sentiment that always gets punished. We had the same thing in mid-February. It took three months, but that's the kind of sentiment you had.

Now, look, big tech is getting absolutely punished three days in a row, as it should, based on how far we've gone and how crazy people's behavior have been. I'll say this, when it comes to tech, I don't think it's my favorite scenario yet, but there is certainly a chance, and a decent one, that tech relative to the Dow and the S&P and perhaps the small caps, tech cycle may have peaked last week.

So if it turns out that way in a couple of weeks, I won't be shocked. This week, I think you really want to see the bulls in technology start to step up tomorrow. It's a shortened week. If this decline continues to roll on in tech more into Thursday and Friday, you're going to put a mini crash scenario on the table where you could, you know, have a quick trapdoor bout of selling.

So it's incumbent upon the bulls and technology. They've got to step up quickly, and they've got, really, two days to do it.

KRISTIN MYERS: All right, so you said a couple of things that I definitely want to pick up there. First on this, you know, being a real mini crash right now for tech, right? I mean, but can it really-- I've been seeing the phrase tech wreck, I guess that euphemism because it rhymes. There's, you know, it's a cute phrase.

But I mean, tech stocks right now have really only given about 10% to 15%. Can we really classify it as a wreck right now?

PAUL SCHATZ: No.

KRISTIN MYERS: And to that second point that you're talking about, that we've already seen a peak in tech, I'm wondering, since they've been leading the market, if they're going to be giving up that leadership position, who are they going to be ceding that position to?

PAUL SCHATZ: So let's unpack this separately. First, tech wreck, right, it sounds really cute, it's kind of quaint and charming. That's why we use those expressions. If you bought tech last Wednesday, you've got a wreck in your portfolio, quite frankly. All those Johnny-come-latelys are feeling the pain a lot.

So no, I mean, if you bought tech two months ago, four months ago, last year, 10 years ago, you're still pretty happy, although, you're probably a little bit concerned. People get concerned about the acceleration of the decline without an intervening rally. My point about a mini crash is tech melted up and it pulled-- it's pulled back beautifully. If you take a step back, it looks beautiful.

However, we're getting to the levels where you should entice buyers to come in. If this is a normal bull market, tech's OK, buyers should come in tomorrow, the next day, that's the norm. If it's Friday and the NASDAQ composite is below, you know, 10,900, I'm going to be more concerned.

To your second point, did tech peak last week? There's a chance that relative to the Dow and the S&P, tech's outperformance may have peaked last week. That will not shock me. Where are people going to go? Well, as I kind of look over at my other screen to my left, I still see pockets of green.

So where are they going? People are going to rotate into where there's perhaps some perceived value, like materials, like transports, even those hated industrials. So that would be a broadening out of the rally. The problem with this rally in the last couple of months is it's been very narrow.

You've got, you know, the FANG stocks plus a couple of more have really pulled everything up. It would not be so bad if the FANG plus a few stocks went-- did this or went down while some of these left-behinds, like small cap value, again, the sectors that I mentioned, began to take some leadership. That would broaden out the rally a little bit more and give us some more legs for another leg higher in the bull market, perhaps after the election.

KRISTIN MYERS: So to that point then, because we have been talking a lot about concerns that perhaps people were a little bit too exposed in the tech sector. Are you looking at this as, OK, this is a really great buying opportunity for some of those stocks that you are mentioning, but perhaps this is also a really good time, you look at your portfolio and say to yourself, OK, maybe I need to be trimming my exposure a little bit, perhaps maybe to some of the Zooms, the Teslas that had a huge run up and then valuations completely decoupled from reality?

PAUL SCHATZ: So valuations' a canard. You-- valuations' the worst timing tool in the history of the markets. The time to trim tech was last week and the week before. We did a-- and we also used keywords like trimming. We sold a good portion of our Apple lab two weeks ago.

And I'm thrilled to take those chips off the table and deploy them elsewhere. The prob-- and I-- no, I don't think this-- I absolutely, pound the table, do not think this is a screaming buy in Facebook, Amazon, Google, Apple, Microsoft, et cetera, no. And even if it turns tail tomorrow and begins to go back up, no, smart money is not going to hop on board those stocks right now.

The easy money has been made. Smart money is going to harvest some acorns and deploy them when it gets a little colder out. I'm sure you'll get some momentum, people flooding back into Apple the minute it begins to uptick, or Amazon, insert your favorite name, Tesla, that's been actually bludgeoned.

But I think smart money is going to look at a little lower volatility in their portfolio, have some dry powder, there's nothing wrong with it. And I'll say this, the other misnomer is that volatility goes up into elections. When an incumbent president is standing for re-election, volatility is actually lower in September and October leading into the election than in other years. So we're not supposed to see, you know, the alligator mouth snap open in volatility heading into the election.