Stocks Finally Fall
The stock market finally fell on Thursday as the momentum tech stocks were responsible for most of the losses. There was profit taking. Stocks that have done the best this summer fell, even the value/cyclical stocks. In the near term, most don’t expect the moderately overbought cyclicals to fall in line with momentum tech stocks.
Overall market was only modestly overbought and expensive if you take out the tech stocks. Problem is these momentum stocks represent about half of the market. They can take down the Nasdaq and S&P 500. It won’t be as bad for the Dow and the Russell 2000. Even though the Dow added Salesforce and removed ExxonMobil, its tech exposure fell because of Apple’s split.
S&P 500 fell 3.5%, the Nasdaq fell 5%, and the Russell 2000 fell 3%. Best parts of the market were the banks and energy. Small cap value fell 1.8%. Regional bank index was up 0.1% and the energy sector fell 0.7%. Exxon only fell 0.2% because it entered the day oversold. Utilities were only down 1.1%.
Sectors that did the best are an infinitesimally small part of the index because FAANMG dominates the indexes. Last time the S&P 500 fell this much the day after hitting a record was September 26th, 1955. On that day, the stock market fell due to President Eisenhower’s heart attack. That’s interesting because there was no obvious catalyst for this decline other than that the market was in a euphoric mania.
As you can see from the chart above, the mega cap internet stocks fell more than 5%. That’s the 11th such decline on record. Investors bet we see another such decline this month. Biggest losers were Apple and Tesla which fell 8% and 9%. A scary part for Tesla is that it’s down 6.5% after hours. It’s down 18.3% in the past 3 days and it’s about to fall on Friday.
How much longer can this decline continue? This recent peak might be the highest Tesla ever gets because it was so overvalued. When investors start to value this company based on its actual business, it will have a market cap in the 10s of billions, not hundreds of billions. It can easily fall in excess of 80% from its record high set on August 31st.
This Is A Major Top
That recent top in the Nasdaq 100 was major. It was the third largest decline for the Nasdaq following a record high in its history. This is only the beginning of a long term downtrend. NAAIM index fell from 106.6 to 94.7. That marks the 8th straight reading above 90. Funds are all long the FAANMG stocks. They aren’t long energy and banks!
As you can see from the chart below, the percentage of Nasdaq 100 members with RSIs above 70 reached about 35%. Tech stocks fell after that percentage reached similar levels in the past 3 years. VIX was up 7.03 to 33.6. It’s already high because it crept up at the end of the rally in August. That was a sign a correction was coming.
COVID-19 Update
There were 1,094 new deaths on Thursday which once again lowered the 7 day average. It was down 7 to 898. That’s the lowest 7 day average since July 22nd. 2nd wave is clearly over as the number of people hospitalized is near the trough set in June.
There are currently 34,676 people in the hospital which is down from about 60,000 at the peak and above the June trough of about 28,000. There is no news on Abbott’s tests which are set to go out in the middle of the month. It doesn’t seem like the market sees this as a silver bullet.
JETS airline ETF has increased recently, but it’s still below its June 8th peak. It’s down 18% since June 8th and 43.5% year to date. If this test works, life could go back to normal, but the market doesn’t see it that way yet. Abbott stock is down 5.2% since August 27th. Good news is Zoom stock is down 16.7% in the past 2 days.
We want investors to be bearish on Zoom because it means they see life returning to normal. Zoom had a great quarter, but that doesn’t mean the stock has more room to increase. That might have been the peak in sales growth as people switch back to doing business in-person over the next few months.
Bulls Aren’t Worried
Sentiment in the stock market was scary on Thursday because many bulls were happy to see a decline. They think that anytime the Nasdaq falls 10%, it’s reloading for another move higher. We don’t want to see the bulls welcoming a decline. Near bottoms, the bulls are scared of declines.
They don’t act like we are seeing them act now. That means we have much more downside ahead. Nasdaq 100 may have made a multi-year high. Stocks like Apple and Tesla might never reach such heights again.
Traders who sold on Thursday likely only bought the momentum stocks because they have been going up. Next group to sell are the ones who have been riding these stocks for months and want to get out while they still have a profit.
A coming decline will shake the confidence of even the most enthusiastic bulls because they don’t believe in valuations. They don’t believe that when a stock falls it gets cheaper. If they believed in valuations, they would never own these stocks near current prices.
Conclusion
Finally, we had a selloff. Most stocks that have done well this summer declined. There is more to come for the hottest tech stocks. Personally, I wouldn’t even think of turning bullish until Tesla falls 50%. At that point, I wouldn’t buy Tesla, but would look for opportunities among the highest quality tech stocks such as Microsoft and Texas Instruments.