Mid-week market update: While it may seem like the Apocalypse for people trading the momentum FANG+ stocks, this is not the Apocalypse. Sure, the market has violated its rising trend line, but this trend break is nothing like the COVID Crash experienced earlier this year.
Before the bears get all excited, there are several key differences between the current trend break and the February trend break. While the NYSE McClellan Summation Index (NYSI) warned of deteriorating breadth in both cases, net NYSE highs have not broken down in the manner of February 2020.
The latest trend break was led to the downside by Big Tech stocks. The analysis of the NASDAQ 100 show similar violations of rising trend lines, and similar warnings by the NASDAQ McClellan Summation Index (NASI), but the NDX/SPX ratio remains in a relative uptrend. We can see the strength of NASDAQ stocks during the COVID Crash by observing that while the SPX broke the uptrend in early February, the NDX uptrend held during that period and did not break down until later in the month. As well, similar the S&P 500 chart, the current readings NASDAQ net new highs are also not showing any signs of signification deterioration.
If this is not the start of a significant pullback, what’s going on? It might be a case of fading macro and price momentum. The Economic Surprise Indices, which measures whether top-down economic data are beating or missing expectations, are all starting to roll over all around the world.
The withdrawal of fiscal stimulus is starting to bite. BoA tracked the card spending of all known unemployment insurance recipients for the month of August, and all have seen significant declines.
Calculated Risk also reported that timely rent payments slid -4.8% in September compared to August.
A recent Bloomberg article enumerated the rising risks all around the world:
The world economy’s rebound from the depths of the coronavirus crisis is fading, setting up an uncertain finish to the year.
The concerns are multiple. The coming northern winter may trigger another wave of the virus as the wait for a vaccine continues. Government support for furloughed workers and bank moratoriums on loan repayments are set to expire. Strains between the U.S. and China could get worse in the run-up toNovember’s presidential election, and undermine business confidence.
“We have seen peak rebound,” Joachim Fels, global economic adviser at Pacific Investment Management Co., told Bloomberg Television. “From now on, the momentum is fading a little bit.”
In addition, different indicators price momentum factor are also weakening.
Another explanation might just be seasonality, which is negative for stocks over the next few weeks.
Renaissance Macro also observed that election year seasonality is turning down just at the right time.
A bounce, then…
In the short run, the market is due for a bounce of 1-3 days as readings as of last night (Tuesday) have become sufficiently oversold to warrant a relief rally.
But make no mistake, this decline isn’t over. The equity-only put/call ratio actually fell even as the market closed near the lows of the day yesterday. This is indicative of excessive complacency among option players.
Watch for a short-term relief rally, followed by a resumption of the pullback.
Disclosure: Long SPXU