Technology bulls were swept lower on Tuesday as fear over regional banks and the health of the global economy set a weaker tone, states Jon Markman, editor of Strategic Advantage.
The Nasdaq 100 fell 0.9% to 13,114. The worry about banks stems from the failure on Monday of First Republic Bank (FRC), the second collapse of a west coast financial institution in as many months. Bears argue that contagion in the financial sector is a natural headwind for the global economy, especially when the world’s central banks keep raising interest rates.
The Federal Reserve is expected on Wednesday to raise its bank overnight lending rate to 5.25%. The S&P Energy, Financial, and Technology sectors declined Tuesday by 4.3%, 2.3%, and 1.0% respectively. Traders seemed to be selling cyclical sectors first and asking questions later. Unfortunately for bears, the broader weakness didn’t imperil the health of the benchmark NDX. Technology stocks have decent relative strength and key stocks continue to find strong bids into weakness.
The NDX also remains well above its rising 20-day and 50-day moving averages at 12,996 and 12,645, respectively. The bottom line is bears will have to do more to shake bulls from positions. Despite the weakness on Tuesday, the benchmark has no important resistance until 13.750, the August 2022 high.
NDX Timing: Members bought the ProShares Ultra QQQ (QLD) on May 2 at $48.20. The 2X leveraged index fund closed Tuesday at $48.72, up 1.1% from the entry-level. Set up to sell half of the new position at $53.80 LMT GTC, and half at $58.20 LMT GTC. Set a new trailing stop loss at $44.20 STP.
Behind the Headlines: The Dow retreated 1.1% and the S&P 500 fell 1.2%. Among sectors, energy, and financials posted the steepest declines, with consumer discretionary as the sole gainer. Breadth favored decliners six-one. There were 565 new lows vs 82 new highs. In economic news, job vacancies in the US came in at 9.59 million as of the last day of March, down from February's revised 9.97 million print, according to the Bureau of Labor Statistics. The consensus was for 9.6 million openings.
March capped off the largest quarterly drop in job openings on record, Oxford Economics said in a note. With the level of openings still elevated, the Fed is likely to opt for another 25-basis-point increase in its policy rate on Wednesday, "as it looks to ensure that the rebalancing of supply and demand in the labor market continues," Oxford said.
The probability that the Fed will increase the rate by 25 basis points fell to 85% from 93% on Monday, according to the CME FedWatch Tool. The odds of the rates remaining unchanged rose to 15% from 7%. Goldman Sachs said the central bank is expected to pause its monetary policy tightening in June, with a rate cut unlikely before 2024.
"By the time of the June meeting, we believe softness in the (economic) data and ongoing worries about the impact of constrained bank credit will probably be enough to deter further hikes," Goldman's Kamakshya Trivedi and Dominic Wilson wrote.