Bulls got a rude wake-up call Tuesday as stocks gapped lower at the open and continued to decline all the way into the close. The S&P 500 finished at 4,352, down 2%, says Jon Markman, growth stock specialist and editor of Strategic Advantage.
The catalyst for the decline was a big selloff in European technology shares. That weakness seeped into US stocks.
The tech-heavy Nasdaq tumbled 2.8%, its worst decline since March. Bears say tech stocks are overpriced given the rise in 10-year Treasury bond yields. Uh, sure, whatever. Higher yields stem from lower bond prices, which historically is a companion of a strong economy.
The selling, so far, looks more like a simple sector rotation toward cyclical issues such as banks, industrials, and energy stocks. The problem is that those stocks alone can’t carry the broader market higher, for the most part.
The only equivalent setup I recall occurred in 2000-2003 when techs were sold all day, every day, while regional banks, REITs, energy producers, and small retailers singularly rose. If that’s the way Mr. Market wants to play it, fine, we can shift in that direction, but it’s far from certain that this is happening.
The VIX Index shot up 23.9% on Tuesday, matching the 23.5% jump on Sept. 20 that concluded the equity market decline. Veteran technical analyst Tom McClellan has done a lot of research on this, and notes that VIX spikes greater than 10% in a single day are pretty good markers of exhaustive sell-offs. I suspect that will be the case in this instance. (For an alternate point of view on the VIX, read the DataTrek section below.)
Critical support for the benchmark S&P is still 4,310. Resistance is the 50-day moving average at 4,443.
The Dow dropped 1.6% to 34,299. Breadth favored decliners 7-1, and there were 164 new highs vs. 221 new lows. Big caps on the new high list included JPMorgan (JPM), Bank of America (BAC), Oracle (ORCL), and Morgan Stanley (MS).
The 10-year US Treasury yield climbed 6 basis points to 1.54%, the highest intraday level since the last week of June.
The Conference Board's Consumer Confidence Index fell to 109.3 in September from 115.2 in August, with declines in both the present situation and expectations readings amid a rise in Covid-19 cases.
If economic conditions continue to evolve as expected, the Federal Reserve will begin to taper its asset purchases soon, but the accommodation from the continued smaller purchases will last through at least mid-2022, Fed Chair Jerome Powell told the Senate Banking Committee on Tuesday.
The Covid-19 delta variant and continued concerns about caregiving have kept the labor force participation lower than was expected, but Powell said these factors "should diminish with progress on containing the virus." If inflation doesn't slow, the Fed "would certainly respond and use our tools to ensure that inflation runs at levels that are consistent with our goal," he added.
West Texas Intermediate crude oil slipped 0.9% to $74.81 per barrel, just off the recent two-month high. The Organization of Petroleum Exporting Countries said Tuesday it expects global oil demand to increase by 17.6 million barrels per day between 2020 and 2045, growing from 90.6 mb/d in 2020 to 108.2 in 2045. However, global oil demand is set to plateau during the second half of the outlook period, from about 2035 onwards, OPEC said.
In corporate news, New Street Research downgraded Applied Materials (AMAT) to neutral from buy. Shares of the chip equipment supplier fell 7% the worst performance in the S&P 500.
2% DOWN DAYS
Checking in with the quants at Bespoke Investment Group, we learned that the 2% drop in the SPDR S&P 500 (SPY) was the first in 95 trading days dating back to May 12.
Since the Covid Crash low on March 23 last year, there have been 18 drops of 2% or more for SPY. Bespoke research shows that SPY has averaged a bounce back of 1.59% on the day after these 2%+ drops with positive returns 15 out of 17 times (88.2%). In the week following these 2%+ drops since the Covid Crash, SPY has averaged a gain of 3.59% with positive returns 14 out of 17 times (82.4%).
While these occurrences are likely to lean positive given that they've come during a strong bull market that began last March, they really highlight the buy-the-dip action that we've seen over the last year and a half, the BI analysts observe.
