 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. The steepest drop in the stock market since June 11th flipped the narrative and sent investors scrambling. Tech got hammered after a two month run and people are asking questions, is this a bubble popping or is it a healthy correction? Are we now going to see a rotation into traditional stocks like banks and maybe certain cyclicals that have lagged behind the technology winners? Hello everyone. And welcome to this week's episode of Wikibon's Cube Insights powered by ETR. In this Breaking Analysis, we want to give you our perspective on what's happening in the technology space and unpack what this sentiment flip means for the balance of 2020 and beyond. Let's look at what happened on September 3rd, 2020. The tech markets recoiled this week as the NASDAQ composite dropped almost 5% in a single day. Apple's market cap alone lost $178 billion. The Big Four, Apple, Microsoft, Amazon, and Google lost a combined value that approached half a trillion dollars. For context, this number is larger than the gross domestic product for countries as large as Thailand, Iran, Austria, Norway, and even the UAE, and many more. Many more. The tech stocks that have been running due to COVID, well, they got crushed. These are the ones that we've highlighted as best positioned to thrive during the pandemic. You know, the work from home, SaaS, cloud, security stocks. We really have been talking about names like Zoom, ServiceNow, Salesforce, DocuSign, Splunk, and the security names like CrowdStrike, Okta, Zscaler. By the way, DocuSign and CrowdStrike and Okta all had nice earnings beats, but they still got killed underscoring the sentiment shift. Now, the broader tech market was off as well on sympathy, and this trend appears to be continuing into the Labor Day holiday. Now, why is this happening and why now? Well, there are a lot of opinions on this. And first, many, like myself, are relatively happy because this market needed to take a little breather. Now, as we've said before, the stock market, it's really not reflecting the realities of the broader economy. Now, as we head into September in an election year, uncertainty kicks in, but it really looks like this pullback was fueled by a combination of an overheated market and technical factors. Specifically, take a look at volatility indices. They were high and rising, yet markets kept rising along with them. Robinhood millennial investors who couldn't bet on sports realized that investing in stocks was as much of a rush and potentially more lucrative. The other big wave, which we was first reported by the Financial Times, is that SoftBank made a huge bet on tech and bought options tied to around $50 billion worth of high-flying tech stocks. So the option call volumes skyrocketed. The call versus put ratio was getting way too hot, and we saw an imbalance in the market. Now, market makers will often buy an underlying stock to hedge call options to ensure liquidity in these cases. So to be more specific, delta in options is a measure of the change in the price of an option relative to the underlying stock, and gamma is a measure of the volatility of the delta. Now, usually volatility is relatively consistent on both sides of the trade, the calls and the puts, because investors often hedge their bets. But in the case of many of these hot stocks, like Tesla, for example, you've seen the call skew be much greater than the skew on the downside. So let's take an example. If people are buying cheap out-of-the-money calls, a market maker might buy the underlying stock to hedge for liquidity. And then if Elon puts out some good news, which he always does, the stock goes up. Market makers have to then buy more of the underlying stock, and then Al goes kick in to buy even more, and then the price of the call goes up. And as it approaches its at-the-money price, this forces market makers to keep buying more of that underlying stock, and then the meltup continues until it stops. And then the market flips like it did this week. When stock prices begin to drop, then market makers, we're going to rebalance their portfolios and their risk and sell their underlying stocks, and then the rug gets pulled out from the markets. And that's really why some of the stocks that have run dropped so precipitously. Okay, why did I spend so much time on this? And why am I not freaking out? Because I think these market moves are largely technical versus fundamental. It's not like 1999 where you had a double whammy of technical rug pulls combined with poor underlying fundamentals for high-flying companies like CMGI and Internet Capital Group, whose businesses, they were all about placing bets on dot-coms that had no business models other than non-monetizable eyeballs. All right, let's take a look at the NASDAQ and dig into the data a little bit. And I think you'll see what I mean and why I'm not too concerned. This is a year-to-date chart of the NASDAQ, and you can see it bottomed on March 23rd at 68.60. And then ran up until June 11th and had that big drop, but was still elevated at 94.92. And then it ran up to over 12,000 and hit an all-time high. And then you see the big drop. And that trend continued on Friday morning. The NASDAQ composite traded below 11,000. It actually corrected to 10% off its high, 9.8% to be precise, and then it snapped back. But even at its low, that's still up over 20% for the year. In the year of COVID, would that have surprised you? In March, it certainly would have surprised me. So to me, this pullback is sort of a relief. It's good, and actually very normal and quite predictable. Now, the exact timing of these pullbacks, of course, on the other hand, is not entirely predictable. Not at all, frankly, at least for this observer. The big question is where do we go from here? So let's talk about that a little bit. Now, the economy continues to get better. Take a look at the August job report. It was good. 1.4 million new jobs, 340,000 came from the government. Those are positive numbers. And the other good news is it translates into a drop in unemployment under 10%. It's now at 8.4%. And this is really good relative to expectations. Now, the sell-off continued, which suggested that the market wanted to keep correcting. So that's good. Maybe some buying opportunities would emerge over the next several months, the market snapped back. But for those who have been waiting, I think that's going to happen. And so that snapback, maybe that's an indicator that the market wants to keep going up, we'll see. But I think there are more opportunities ahead because there's really so much uncertainty. What's going to happen with the next round of the stimulus? The jobs report, maybe that's a catalyst for compromise between the Democrats and the Republicans, maybe. The US debt is projected to exceed 100% of GDP this calendar year. That's the highest it's been since World War II. Does that give you a good feeling? It doesn't give me a good feeling. And when we talk about the election, that brings additional uncertainty. So there's a lot to think about for the markets. Now, let's talk about what this means for tech. Well, as we've been projecting for months with our colleagues at ETR, despite what's going on in the stock market and its rise, there are some, there's those real tech winners, we still see a contraction in 2020 for IT spend of minus 5% to 8%. And we talk a lot about the bifurcation in the market due to COVID accelerating some of these trends that we're already in place like digital transformation and SaaS and cloud. And then the work from home kicks in with other trends like video conferencing and the shift to security spend. And we think this is going to continue for years. However, because these stocks have run up so much, they're going to have very tough compares in 2021. So maybe time for a pause. Now let's take a look at the IT spending macroeconomics. This data is from a series of surveys that ETR conducted to try and better understand spending patterns due to COVID. Those yellow slices of the pies show the percent of customers that indicate that their budgets will be impacted by coronavirus. And you can see the, there's a steady increase from mid-March, which, you know, blend into April. And then you can see the June data, it goes from 63% saying yes, which is very high to 78%, which is very, very high. And the bottom part of the chart shows the degree of that change. So 22% say no change in the latest survey, but you can see much more of a skew to the red declines on the left versus the green upticks on the right-hand side of the chart. Now take a look at how IT buyers are seeing the response to the pandemic. This chart shows what companies are doing as a result of COVID in another recent ETR survey. You know, now of course, no surprise, everybody's working from home, nobody's traveling for business, not nobody, but most people aren't, we know that. But look at the increase in hiring freezes and freezing new IT deployments and the sharp rise in layoffs. So IT is yet again being asked to do more with less. They're used to it. Well, we see this driving an acceleration to automation and that's going to benefit, for instance, the RPA players, cloud providers, and modern software vendors. And it will also precipitate a tailwind for more aggressive AI implementations. And you know, many other selected names are going to continue to do well, which we'll talk about in a second. But you know, they're in the work from home, the cloud, the SaaS and the modern data sectors. But the problem is those sectors are not large enough to offset the declines in the core businesses of the legacy players who have a much higher market share. So the overall IT spend declines. Now, where it gets kind of interesting is the legacy companies, look, they all have growth businesses. They're making acquisitions, they're making other bets. IBM, for example, has its hybrid cloud business in Red Hat. Dell has VMware and it's got work from home solutions. Oracle has SaaS and cloud. Cisco has its security business. HPE, it's as a service initiative and so forth. And again, these businesses are growing faster, but they are not large enough to offset the decline in core on-prem legacy and drive anything more than flat growth overall for these companies at best. And by the time they're large enough, we'll be into the next big thing. So the cycle continues. But these legacy companies are going to compete with the upstarts and that's where it gets interesting. So let's get into some of the specific names that we've been talking about for over a year now and make some comments around their prospects. So what we want to do is let's start with one of our favorites, Snowflake. Now, Snowflake along with Asana, JFrog, Sumo Logic and Unity has a highly anticipated upcoming IPO. And this chart shows new adoptions in the database sector. And you can see that Snowflake, while down from the October 19th survey is far outpacing its competitors, with the exception of Google, where BigQuery is doing very well. You see Mongo and AWS remain strong and I'm actually quite encouraged that it looks like Cloudera has righted the ship and you kind of saw that in their earnings recently. But my point is that Snowflake is a share gainer. And we think we'll likely continue to be one for a number of quarters and years if they can execute and compete with the big cloud players. And that's a topic that we've covered extensively in previous breaking analysis segments. And as you know, we think Snowflake can compete. Now let's look at automation. This is another space that we've been talking about quite a bit. And we've largely focused on two leaders, UiPath and Automation Anywhere. But I have to say, I still like Blue Prism. I think they're well positioned. And I especially like Pegasystems which has for years been embarking on a broader automation agenda. What this chart shows is net score or spending velocity data. For those customers who said they were decreasing spend in 2020. Those red bars that we showed earlier are the ones that are decreasing. And you can see both Automation Anywhere and UiPath show elevated levels within that base where spending is declining. So that's a real positive. Now Microsoft, as we've reported, is elbowing its way into the market with what is currently an inferior point product. But you know, it's Microsoft, so we can't ignore that. And finally, let's have a look at the all important security sector. Which we've covered extensively and put on a report recently. So what this next chart does is cherry picks a few of our favorite names and shows the net score or spending momentum and the granularity for some of the leaders and emerging players. All of these players are in the green, as you can see in the upper right. And they all have decent presence in the data set as indicated by the shared ends. Okta is at the top of the list with 58% net score. Palo Alto, they're a more mature player but still they have an elevated net score. CrowdStrike's net score dropped this quarter which was a bit of a concern, but it's still high. And they're followed by SailPoint and Zscaler who are right there. The big three trends in this space right now are cloud security, identity access management and endpoint security, those are the tailwinds. And we think these trends have legs. Remember, net score in this survey is a forward looking metric, so we'll come back and look at the next survey which is running this month in the field from ETR. Now, everyone on this chart has reported earnings except Zscaler which reports on September 9th. And all of these companies are doing well and exceeding expectations but as I said earlier, next year's compares won't be so easy. Oh, and by the way, their stock prices, they all got killed this week as a result of the rug pull that we explained earlier. So we really feel this isn't a fundamental problem for these firms that we're talking about, it's more of a technical in the market. Now, automation anywhere in UiPath, you really don't know because they're not public and I think they need to get their house in order so they can IPO. So we'll see when they make it to public markets. I don't think that's an if that I think they will IPO but the fact that they haven't filed yet says they're not ready and why wouldn't you IPO if you were ready in this market despite the recent pullbacks. Okay, let's summarize. So listen, all you new investors out there that think stock picking is easy, look at any fool can make money in a market that goes up every day but trees don't grow to the moon and there are bulls and bears and pigs and pigs get slaughtered and I could throw a dozen other cliches at you but I am excited that you're learning. You know, maybe you made a few bucks playing the options game. It's not as easy as you might think. And I'm hoping that you're not trading on margin but look, I think there are gonna be some buying opportunities ahead. There always are, be patient. It's very hard actually impossible to time markets and I'm a big fan of dollar cost averaging and young people if you make less than $137,000 a year load up on your Roth, it's a government gift that I wish I could have tapped when I was a newbie. And as always please do your homework. Okay, that's it for today. Remember these episodes they're all available as podcasts wherever you listen so please subscribe. I publish weekly on wikibon.com and siliconangle.com so check that out and please do comment on my LinkedIn posts. Don't forget, check out etr.plus for all the survey action. Get in touch on Twitter, I'm at dvalante or email me at david.valante at siliconangle.com. This is Dave Vellante for theCUBE Insights powered by ETR. Thanks for watching everyone. Be well and we'll see you next time.