By Pete Biebel, Senior Vice PresidentPrint This Post
The sweet emotion of the stock indices dancing steadily higher for the past couple months was suddenly squelched last Thursday. The mega-cap tech stocks, which had helped pump up the major averages for months, suddenly deflated. When it became evident that those leaders had, at least temporarily, lost their mojo, it triggered a rush for the exits in those names and weighed on the market in general. The overall market was helpless to keep the party going after the leaders checked out.
Neither the occurrence of the sell-off nor its rapidity were unexpected. Many stocks and the averages themselves were greatly extended. Market breadth was ominously thin. Speculative excess had become a hallmark of trading activity. Something sometime had to give. And when it gave, a steep decline followed. I have written recently about the likelihood that, when a pullback began, it would probably be severe. Trend-following systems and risk parity funds would all get sell signals and be forced to do some liquidating. Momentum players and hot money traders, who all knew they were chasing a very pricey market, would likely have placed stop-loss orders just below the market to limit losses. Any selling would likely beget more selling. And on Thursday it begot a lot.
Underlying currents were roiling the waters early in the week. Strength in many of the leading mega-cap tech stocks was on display from the opening bell on Monday. Recall that stock splits in some of the strongest of those issues became effective last Monday. In typical “buy-the-rumor, sell-the-news” fashion, those stocks, which had run up considerably in anticipation of the splits, enjoyed one last session of strength before rolling over on Tuesday and trending lower for the balance of the week.
Even without the help of some of those leaders, the broad averages were able to surge higher again on Wednesday. Hopeful news on a COVID vaccine and a hint of progress on the next stimulus bill helped to fuel the rally. The NASDAQ Composite Index (COMP) gained about 1% for the day, trading above and closing above the 12,000 level for the first time. The S&P 500 Index (SPX) also closed at a record high on Wednesday, adding 1.5% for the day. The Dow Jones Industrial Average (DJIA) gushed higher by 1.6%, just enough for it to close above the 29,000 level for the first time since late-February. The leading sectors that day were an unfamiliar crew with Utilities, Materials and Real Estate at the front of the pack.
Better than expected reports on Initial Unemployment Claims, Continuing Claims and Productivity helped the mood on Thursday morning, but the mounting rush out of some of the big tech leaders easily overwhelmed the economic news. While DJIA managed to trade briefly in the green that morning, COMP and SPX gapped lower on the opening and headed lower for the next six hours, rebounding only slightly in the last half-hour of the session. The S&P Technology Sector Index fell 5.7% that day, leading to losses of 5% for COMP and 3.5% for SPX. Several of the individual big tech names had one-day losses of 5% to 8%.
Friday morning brought steep follow-through selling. The broad averages saw their lows for the day and the week in the first hour or two that morning, then recovered most of those losses in a pre-holiday-weekend Friday afternoon rebound. DJIA’s loss for the week was just over 1.8%, while SPX fell about 2.3% and COMP lost nearly 3.3%.
Solid gains in several specialty chemical company stocks were the catalyst that helped the Basic Materials sector post a 0.73% net gain for the week. The Utilities sector (+0.44%) was the only other U.S. equity sector that avoided losing ground last week. Not surprisingly, the Technology sector was at the bottom of the list with a 4.4% loss for the week. But, surprisingly, the Energy sector was nearly as bad with a 4.3% loss. A decline in the price of crude oil from near $43 a barrel early in the week to near $39 on Friday was largely to blame.
One technical factor to watch over the next few days is the 20-day moving averages on COMP and SPX. Since the rally began in late-March, those averages have endured about a half-dozen minor, two to three day pullbacks. There have been just a few occurances where COMP or SPX closed below their 20-day moving averages. Significantly, on each such occurance, the indices were higher the following trading session. In other words, there were no occurances of back-to-back losses with closes below the 20-day average. On Thursday, both indices found support at their 20-day MAs and closed just above those levels. With Friday’s losses, both closed just a whisker below their 20-days.
The next few days should tell us whether the market will be able to get back on its feet after last week’s stumble, or if the averages are likely to stagger lower for longer. I wrote last week, “The first short-term sign of a potential trend reversal would be a significant break of the 3390 level, more than 3% below Friday’s close. The first key level below that would be SPX’s 50-day moving average in the 3280 area.” SPX traded below 3390 for about an hour Friday morning before rebounding to close well above that level near 3427.
If SPX sees sustained trading below 3390, then the odds would favor a continued decline to the 3290 – 3300 range and the neighborhood of its 50-day moving averge. The key levels below that seem to be at 100-point intervals. The 3200 level is in the area of the June highs and the late-July low. Below that, the 200-day moving average for SPX currently stands just below 3100.
The short week brings a short list of earnings announcements and an even shorter list of economic reports.
|Tuesday 9/8/2020||NFIB Small Business Optimism Index||98.8||98.9|
|Wednesday 9/9/2020||JOLTS Job Openings, July||5.889mm||5.950mm|
|Thursday 9/10/2020||Initial Jobless Claims||881K||830K|
|PPI-Final Demand, August, M/M||+0.6%||+0.3%|
|PPI-FD, ex-Food & Energy, August, M/M||+0.5%||+0.3%|
|Wholesale Inventories, July, M/M||-1.4%||-0.1%|
|Friday 9/11/2020||Consumer Price Index, August, M/M||+0.6%||+0.3%|
|CPI ex-Food & Energy, August, M/M||+0.6%||+0.3%|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.