Decline Not Over
Some thought the correction would start on Tuesday because the pros tend to go on vacation before Labor Day. We did get a decline on Tuesday, but obviously the correction started last week. It’s amazing how people are saying the market has fallen too much, meaning the correction is over.
Did they miss the entire summer rally? This was the most euphoria since the late 1990s. Nasdaq is going to fall a lot more than 10%. It might even fall more than it did in March. Bulls need to learn the difference between the short and intermediate term. Of course, stocks have fallen a lot in 3 days.
We might see a modest rally in the near term. However, over the next few months, the Nasdaq’s September 2nd peak will be maintained. In fact, the Nasdaq might not surpass that peak for several years. Momentum tech stocks will fall in the next few years because of increased competition, high valuations, and a return to normalcy (no COVID-19).
If rates rise, that could be a 4th catalyst. There was a hiccup with one of the vaccines on Tuesday, but that doesn’t change my outlook on a return to normalcy. Global 7 day average of deaths per day peaked on August 13th (lower peak than April). There are still numerous treatments and vaccines in the works.
Nasdaq’s Correction
Nasdaq is down 10% in the past 3 days which is its quickest correction ever. Shorts should take profits because that’s a quick decline for 3 days. However, this correction is far from over. As you can see from the chart below, the Nasdaq 100 has been above its 50 day moving average for 103 days.
The market needs to tell the euphoric bulls that most of the gains in the summer were due to call buying, not because people will be working from home and ordering goods online forever. Speculators would buy out of the money call options which would force dealers to buy the underlying stock to hedge themselves. In the intermediate term, investors will need to learn that just buying the dip on any speculative tech stock doesn’t work.
Slack Disappoints Investors
One example where buying the dip has been a disaster is Slack. Its stock fell 18.7% on earnings after hours. This is the 2nd quarter in a row that disappointed investors. Speculators expected it to benefit more from the work from home trend. The firm broke even which beat estimates for a loss of 3 cents. It had $215.9 million in sales which beat estimates for $209.1 million. The firm had 130,000 paying customers which is up 30% from last year and 2,000 above estimates.
These modest beats aren’t enough for what should be the best time ever for Slack. It’s having a tough time competing with Microsoft Teams. The firm provided weak guidance. It expects a Q3 loss of 6 to 5 cents and sales of $222 to $225 million. Estimates were for a 5 cent loss and sales of $223.7 million. Investors expected it to knock it out of the park, but the firm hit a single.
Tesla Has The Biggest Decline In Its History
Biggest decliner was Tesla which is no surprise because it has been the biggest winner of the year. The stock fell 21% on Tuesday which was its biggest decline in its history. And the stock is down 33.7% since August 31st. It’s still up 16.4% in the past month, showing how much of a bubble it was in. As with the Nasdaq, Tesla can easily recover in the next few days, but in the next few months, it will be lower.
We could see the stock rally heading into Battery Day before crashing again. Bulls still strongly believe in Tesla. They are way too confident. Not being included in the S&P 500 won’t scare many bulls. We need fear about the business to percolate. We can expect this stock to fall at least 50% from its peak. It can easily fall 80%.
Consumer Reports recently reviewed its $8,000 full self-driving add-on, saying it’s not worth the money. Bull case that it will be able to raise prices further on that product is ridiculous. If it were to charge $10,000, very few people would buy it. This product simply doesn’t consistently work.
Apple Crashes Too
Apple has fallen 13% in the past 3 days which is its biggest 3 day decline since 2008 as the chart below shows. This isn’t an ordinary decline in the stock. We are seeing it come off a euphoric top. It should scare the bulls that literally nothing caused such a big decline. A decline in 2008 was caused by a global financial crisis.
Review Of Tuesday’s Action
S&P 500 fell 2.78%, the Nasdaq fell 4.11%, and the Russell 2000 fell 2%. Most expected the Nasdaq to underperform and the small caps to outperform. A shocking part of the decline were the big moves in energy and regional banks. Imagine hiding out in energy because the tech stocks have been going up too much only to lose 3.6% in energy. That hurts.
Exxon stock fell 2.3% which is a big deal because it’s down 30.3% since June 8th. It’s only up 21.4% since the March bottom. At the start of the rally, energy outperformed. That has since reversed. Similarly, the regional bank index fell 4%. At least it’s only down 17% since June 8th (energy is down 28.3%).
Wells Fargo is the Exxon of the banks as it fell 3.3% on Tuesday and is down 28.1% since June 8th. It’s actually down 5.1% since its March low. That’s impressively bad. All sectors fell on Tuesday. Best performer was the utilities which fell 0.6%. Worst performer was tech of course as it fell 4.5%. It’s down 11.2% since September 2nd, slightly underperforming the Nasdaq. S&P 500 is down 6.95% in the past 3 days.