The orderly retreat by bulls accelerated on Friday as weakness for semiconductors, and a long week of lower prices, weighed on sentiment, states Jon Markman, editor of Strategic Advantage.

The Nasdaq 100 closed at 15,028, a decline of 0.7%. The loss for the NDX pushed the weekly loss to 1.6%. The downdraft for tech stocks earlier in the week doomed bulls on Friday. It's extremely tough to manufacture any type of advance going into the weekend when shares have trended lower previously. Traders simply refused to carry inventory. It also doesn't help that semiconductors have lost their luster. Since the poor financial results for Advanced Micro Devices (AMD) a week ago, the entire group has been under pressure.

The fund VanEck Vectors Semiconductor (SMH) declined last week by 5.2%. In fairness, these stocks have run up a great deal in 2023, and some pullback was in order. Unfortunately for bulls, the weakness comes at a vulnerable time. Bears say that stocks have run ahead of fundamentals. The weakness for the SMH seems to support this theory.

Perhaps more importantly, the Biden Administration has chosen this moment to dial up the political pressure on Chin by promising to ban sales of high-end semiconductors considered essential to both its war-fighting capabilities and its efforts to build and use dangerous strains of artificial intelligence.  I am skeptical of the utility of these kinds of prohibitions, but in the meantime chip company shareholders shoot first and ask questions later. Very often these battles are like fights in modern professional hockey: ugly, mean, and brief.

Indeed, the silver lining is that large-cap technology issues are now oversold, and shares of many of the most important firms are heading into a period of seasonal strength. Bulls should be encouraged by the latest iPhone reveal in mid-September, and you can expect an upbeat vibe emanating off investor conferences later in the month.

It is important that bulls retake the 50-day moving average of the Nasdaq 100 on Monday. That level was lost in the late decline on Friday.

Notes On My Scorecard

This has been a disappointing month for bulls, as August so often is. The blues stretch into every sector and theme, with the Dow down 0.9%, the S&P 500 down 2.8% and the Nasdaq 100 down 4.6%. The large caps, midcaps and small caps alike are all down around 2.8%, value and growth are both down, and tech is off 6.4% while utilities are off 3.8%.

The only rays of sunshine are emanating from energy and healthcare stocks, as well as the raw commodities natural gas and crude oil. Other than these narrow paths, the old phrase “nowhere to hide” comes to mind.

Let’s get at little more granular and forward looking.

Analysts at Bespoke Investment Group observe that the biggest event to occur this week from a technical perspective was the Nasdaq 100 breaking and closing below its 50-day moving average for the first time in 103 trading days dating back to March.

So, here’s why that can be relevant: Near-term forward performance has in the past proven to be quite negative for the Nasdaq 100 after it ends 100+ day streaks of closes above its 50-DMA, according to Bespoke data. There have been ten 100+ day streaks of closes above the 50-day prior to this one, and in the week following the end of those streaks, the Nasdaq 100 was lower nine times for an average drop of 2.04%, according to the Bespoke data. Over the next month, the average move has been -0.65%, and the mood does not improve again until you go out six to twelve months, the research shows.

Ruh-roh. Sounds bad and it could be worse, but don’t panic. We’ve seen these troubles over and over with techs and high volatility mega-cap over the years and there is always a way to avoid, counter and take advantage. But first let’s see what happens today as it could set the pace for at least a modest rebound. Either way, we need to update the stops and targets for our current positions. 

Learn more about Jon Markman here...