Another Selloff
The stock market declined again on Friday as it fell through the technically important 50 day moving average. As you can see from the chart below, the streak of trading days above the 50 day moving average ended at 103. This was one of the highest streaks in the past 13 years.
Obviously, the speed of the rally was more impressive than its length. Another key thing people were watching was that the S&P 500 fell below its September 8th low. This is now a 7.3% decline from the record high. It’s nearing correction territory.
It's possible the stock market is falling because tech was overbought and worries about COVID-19 since cases are rising in Europe. Cases increased to 51,345 in America on Friday, but that was largely because of record high tests. There were 986,403 tests as we are on the precipice of rapid testing which spikes that even further. These will be the last few days without the millions of antigen tests that are coming soon.
It was correct to predict a tech selloff, but this isn’t going exactly as expected. While Apple is cratering (down 20.4% since its record), Zoom was up 6.2% on Friday. It’s up 25% since September 8th. This hasn’t been a wholesale selloff in all the hottest stocks.
For example, Draftkings was up 4.3% on Friday as it is up 49.7% since September 8th and 87.8% since July 13th. Tesla was up 4.4% as Battery Day is one of the most hyped events we've ever seen. Penn National Gaming was down 3.3% on the launch of its betting app in a sell the news trade.
Real Correction Hasn’t Started
Friday was an across the board decline with more weakness in big cap tech stocks; that has been the story of this September. Nasdaq is down 8.3% this month and 10.5% from its peak. Nasdaq 100 is down 11.9% from its peak. It has had a triple digit move in 92% of the days this month which is the highest monthly rate since April 2001 when the rate was 100%. It was 91% this March.
Tech stocks are struggling to rally because they have lost momentum. They don’t become good values after a 10% decline, so they have no support. Pretty much everyone is long them, so there are few left to buy.
If someone didn’t buy tech because they thought it was a bubble, they aren’t going to buy it after a 10% decline. As you can see from the chart below, the Russell value index has outperformed the growth index by more than 5% this month for the first time since the tech crash in 2000. This looks like the bubble crash which should scare tech longs. Fact that Tesla, Draftkings, and Zoom still haven’t fallen signifies the decline likely isn’t over.
A real decline will likely come when the 10 year yield rises and rapid testing is available. All indications say that testing is coming in a couple weeks and information on 2 vaccines should be available by the end of the year. The COVID-19 stocks have had their day. It might be over for them. That’s an opinion which hasn’t been truly verified by this correction as Zoom spiked today and the JETS airline ETF fell 2.9%.
Details Of Friday’s Action
S&P 500 fell 1.1%, the Nasdaq fell 1.1%, and the Russell 2000 fell 0.4%. Biggest decliners were the stocks hurt by COVID-19 as the cruise stocks were hit hard. It seems like the barbell approach to investing hasn’t worked because the stocks most hurt by COVID-19 are falling and some of the stocks that are helped by it are also falling.
Banks have been outperforming as the regional bank index was down 0.7%. Small cap value stocks fell 0.7%. Cloud index was actually up 0.9% because of Zoom. Snowflake was up 5.5%. Generally, stocks don’t crater after their IPO. Banks and market makers want to avoid a crash because it makes everyone look bad.
Every sector was down. Worst decliners were actually real estate and utilities which fell 2% and 1.8%. Friday had weird action near the close because of quadruple witching. This occurs once every quarter on the 3rd Friday of the last month of the quarter. Personally, I’m ignoring the action at the end of the day, and working off the assumption that these moves will reverse on Monday.
We Need A Comeback
Upper middle class and the rich are doing fine in this partially shutdown economy because they can work from home. Plus, the technology companies that make that happen and the online retailers are doing well. However, a huge swath of the economy has been left out. We need to get the leisure and hospitality industry back on track or else millions of people and small business will be devastated.
As you can see from the chart below, 32,109 restaurants that were open on March 1st are closed. 39% are temporary closures which means if the economy can reopen now, we can get those thousands of restaurants back. Same is true for shopping & retail, beauty & spas, bars, and gyms. Each week that goes by means more small businesses get permanently shutdown. It’s late in the game.
Conclusion
Large cap tech stocks are falling faster than the small caps as Apple is down over 20%. Most predicted this selloff, but it hasn’t gone exactly according to plan.Some of the hottest stocks are still up and the banks aren’t exactly rallying. Economic reopening trade is not on.
10 year yield is not rallying. This has been a glancing blow to the momentum investors riding stocks like Amazon, Tesla, and Draftkings. A spike in cases in Europe is turning many off to the idea that COVID-19 is going away. Investors clearly don’t believe rapid testing will get the economy back to normal.