OK; what was that all about? Yesterday’s late pullback, that is.
As veteran technical traders will tell you, sometimes a violent reversal of the trend will flush out the “weak hands” and then return immediately to the trend. But if we’ve learned one thing in 2020, it’s that volatility can manifest itself at any time. In this market it seems there’s always enough uncertainty to rain out any ball game—even when it looks like blue sky above.
Considering the major indices snapped back in the overnight hours, was yesterday afternoon one of those occasional “flushes?” Or was it a reminder that this market has gotten ahead of itself? Here’s what we know.
When the sluggers strike out, it’s hard to rack up much offense.
Investors got reminded of that Tuesday after the S&P 500 Index (SPX) failed in its attempt at new all-time highs and descended abruptly to post sharp losses. The FAANGs, including Apple Inc /zigman2/quotes/202934861/composite AAPL +3.03% , all fell 1% or more, with AAPL off 3%. As noted here yesterday, these stocks exert a huge weight on the major indices. They’ve helped carry the market higher for months, and on Tuesday they helped push it down as the SPX fell for the first time in eight sessions.
When you see what we appear to be having now—a pullback in Tech and a rotation into value—it becomes difficult to keep momentum. With all the FAANGs having a rough day at the plate, it gets even harder. Some of the late pressure yesterday might have stemmed from reports of more static between negotiators in Washington trying to hash out a new stimulus, as well as trepidation ahead of the Democratic vice presidential announcement that investors had been told was looming.
In normal times, Financials (the second-largest SPX sector) might be able to pick up some of the slack. And in general, banks performed pretty well Tuesday when you look at both the biggest ones on Wall Street and the regionals. Financials might get more tailwind today with Treasuries falling again.
Still, banks face a giant headwind trying to make money with rates so low historically, and can’t necessarily be counted on to come out and have a great day every session. Until they get into a better position, it could be challenging to make a long run and get firmly above those old intraday highs above 3390 for the SPX.
To put it in context, though, “old” isn’t really the best word for a time less than six months ago. The market looks like it’s following the example of its 2009 comeback when it rallied 50% from its March lows by August, an analyst noted on CNBC.
As we near the all-time highs, the “fear factor” might come in, too, with some people maybe wondering if the market has come too far. Technical factors might also be at work. As of Tuesday, the SPX was trading around 10% above its 200-day moving average. This is about where some past rallies have run into selling pressure.
There was also a big swing Tuesday out of the stocks and other investments with the strongest recent performance. Besides AAPL, these included gold and Treasuries. All this could reflect a one-session change in the wind or maybe something a little more dramatic. The Nasdaq (COMP), where so many big Tech stocks live, has declined three days in a row and appears to be scuffling a bit after leading the rally earlier this summer.
Once again Tuesday, the small-cap Russell 2000 Index (RUT) had the best day of any major index, perhaps reflecting more people jumping onto the value train. The small-cap rally isn’t happening in a vacuum. Results for RUT firms in Q2 have been better than analysts had expected, Barron’s reported. Also, The Wall Street consensus estimate for the RUT’s combined 2020 earnings per share is up 35% since the start of Q2 earnings season. Large-cap estimates have climbed, too, but only about 4% in the same period.
Reopening trade dominated early this week before the market wobbled into Tuesday’s close. Optimism about progress with vaccines and falling caseloads could help explain why some investors are getting out of risk-off trades like gold and Treasuries. However, they appear to be piling into “value” areas, which doesn’t necessarily help the big indices. If this pattern continues, it could be tough for the huge rally to continue even if the new pattern reflects more strength in the broader economy.
Speaking of which, some analysts said hopes for strong data might account for the big sell-off in Treasuries yesterday that sent the 10-year yield up to an intraday peak of 0.66%. That’s the highest level in nearly a month. Gold tumbled a massive 5.5% Tuesday, ending way below $2,000 an ounce. The yield curve-steepening seen Tuesday likely helped the Financial sector. “Risk-off” seems to be the early word Wednesday as Treasuries and gold come back under pressure.
One day is one day, not a trend. Still, you can’t help but wonder if there’s some sort of pattern change when you see so many people getting out of the trades that dominated the scene over the last month or two.
It’s probably been the strangest summer of most of our lives. That doesn’t mean people aren’t taking summer vacations (in some sense of the word) before kids go back to school (in some sense of the word). All of which could help explain the low volume seen recently, not atypical during the “dog days” of August. With volume low, you sometimes see sharp moves like the one late Tuesday. With that in mind, anyone jumping into or out of the market might want to be especially careful the next few days.