We’ll start by saying that if it turns out be true that President Trump played a large role in getting the Big 10 to reinstate their football season, the election in over! Given how important college football is to the people of Michigan, Ohio, Pennsylvania, Indiana, Iowa, Illinois, Minnesota and Wisconsin...if the President is the reason they got their season back, he’ll win EVERY state in a landslide!
Okay, we’re not serious about that last comment...but we ARE serious about our next comment: Stop blaming the Fed for yesterday’s reversal in the stock market and this morning’s decline in the futures!!! We are hearing some ridiculous explanations this morning as to why the Fed is to blame. In reality, they could not have been more dovish yesterday. So the real reason we’re seeing some renewed weakness is because the market was already ripe for another leg in the recent decline...and nobody wanted to sell anything in front of the Fed’s announcement. Now that the Fed is behind them, they’re starting to take profits once again.
As we have been saying for two weeks now, whenever the stock market gets to the kind of extremes it reached in early September...in terms of being overbought and overvalued...it always declines in several waves...to work-off those extreme conditions! Therefore, we predicted that this week’s bounce would only be a very short-lived one...and we’d see another “wave” lower before this decline found a bottom. In other words, what is taking place right now is nothing more than the normal (and healthy) process that we always go through after the stock market reaches the extremes it did in late August/very-early September!
Yes, there are always a bunch of propeller heads...who never worked on a trading desk...who always try to come up with some sort of fundamental reason for declines like these...when the real fundamental reason was already determined before the decline started. In this case, that fundamental reason is that the stock market sometimes moves SO far ahead of the underlying fundamentals that it has nowhere to go but down for a while.......This doesn’t mean that the market has to fall into a bad bear market. It simply means that the market was going to decline further no matter what the Fed said yesterday.
So again, stop blaming the Fed!!!! Their Herculean efforts in March are beyond reproach...so investors have to get over the fact that they’re not overly worried about a full correction in the stock market...after a 77% rally in the NDX Nasdaq 100 index over just five months. In fact, their concerns SHOULD be muted...given that the credit markets (which had COMPLETELY broken-down/frozen-up in March) are not showing any signs pronounced stress right now.
Okay, let’s talk about the specifics of what we saw yesterday afternoon...and what we’re seeing this morning. Yesterday’s intraday reversal in the stock market gave us “outside-down” days in both the S&P 500 index and the Nasdaq Composite. The decline came on a 21% increase in volume, so the recent trend of “big volume down-days” and “light volume up-days” continues...which is not a good sign.
However, our biggest concern remains the action in the mega cap tech names. Most of them have actually been acting quite poorly this week.Yes, NVDA saw a nice bounce off of its lows from last Tuesday (as did TSLA), but the rest of the names had seen very feeble bounces going into yesterday...and they had retraced very little of their early-September declines.
Now, the rest of these mega cap names (FB, AMZN, AAPL, MSFT, NFLX, GOOGL) are very close to testing their recent lows again. Actually, FB and AMZN have already made “lower-lows”...but the others closed slightly higher than their recent lows last night. (BTW, they all look like they open below those lows this morning.).....Having said this, we’ll have to see something more than just a slight new “lower-lows” in these names to raise another red warning flag on these tech names. But if they do indeed see any kind of meaningful drops from where they closed last night, it’s going to be quite negative for these stocks. Since they have been the key leadership stocks for the broad market all year, another meaningful decline in the group will be negative for the stock market as well. (Two charts below.)
We’ll finish by going back to the theme we highlighted at the beginning of this piece. It usually takes a “failed” rally in the stock market (like the one we saw early in the Q1 decline)...and another meaningful decline (to lower-lows)...before the market can wash-out the froth that existed in August and the very beginning of September. If we make a lower-low in these key tech stocks, the odds will grow greatly that we’ll see the S&P drop 10%+ below its record highs...and the Nasdaq decline 15%+ from its own recent highs...before it sees a bottom of some substance. So it will NOT be the Fed who is to blame if this market falls further.
If people are looking for somebody to blame, they ought to (finally) think about blaming Congress for not extending the stimulus packages they provided earlier in the year. However, no matter how you slice it, the market is merely doing what is normal and healthy after such a huge rally over the previous five months.......Don’t fight it. Let it playout...and then take advantage of the opportunities that present themselves when it’s over.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.