Update for Thursday, June 11th, 2020
That was not fun. A Big sell-off on Thursday! Is this a normal pullback or signs of something more ominous on the horizon. To answer this we will take a look at 3 things: 1) the technical health of the indexes, 2) price action of widely held institutional stocks, and 3) how did high velocity growth stocks perform.
The Indexes.
Until Thursday’s plunge, stocks had staged a remarkable rebound from the March 23 lows—the S&P 500 had gained 45% in 53 trading days to return to positive territory for the year. That the ascent occurred as evidence grew that the economy was gripped by recession was all the more extraordinary. But yesterday’s 5.9% drop for the S&P 500 and 6.9% decline for the Dow Jones Industrial Average may well have reflected economic pessimism catching up with investor optimism. Or not. As we write this, the stock markets are showing modest gains for the day.
Through Thursday, the Dow and the broader S&P 500 index were down 10.9% and 6.2% for the year, respectively. The MSCI EAFE index, a measure of developed international stock markets, is down 11.0%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index was 1.27%, down from 2.31% at year end. On a total return basis, the U.S. bond market has gained 5.9% for the year.
Thus far the NASDAQ had crossed and failed at the breakout level (9838 high from February) and the psychological 10,000 level. Often obvious breakouts and important levels that acted as resistance in the past may play a significant role or may just take some time to work through. A 5% correction is not unusual in a strong uptrend. On the positive side, on Friday the NASDAQ undercut its 20-day moving average but was able to recapture this line, still trending upward treating the breakout level as a speed bump for now. So we need to see the NASDAQ stay above the 20-day line, recapture the 9838 level and the 10,000 level, to continue in this trend.
The S&P 500 has been lagging the NASDAQ, also took a big hit this week, but was able to recapture its 3000 level which previously had played a significant resistance. The S&P 500 is right below its 20-day moving average. So if the S&P stays above 3000 level and continues trending above its 20-day line, the market may have life.
Widely Held Institutional Stocks.
We get a bit of a mixed picture here. Stocks like Amazon (AMZN), Apple (AAPL), Adobe (ADBE) have been able to stay above breakout and key levels, stocks like Facebook (FB), Microsoft (MSFT)are just slightly below key levels, Alphabet (GOOGL) failed right at its 1 trillion dollar market cap, but still above its breakout level. Advance Micro Devices (AMD) failed its breakout on Wednesday, while fellow chipmaker Nvidia (NVDA) stays above key levels. Tesla (TSLA) failed at its obvious breakout level ($969) and the psychological $1000 level, but was still positive for the week +5.6%, and still above key levels.
High Velocity Growth Names:
This was perhaps the most surprising event this week, as the market was getting routed on Thursday , high velocity growth stocks usually get destroyed in this scenario, surprisingly many of these stocks held up extremely well. I am referring to stocks like DataDog (DDOG) up 10% for the week, Bill.com (BILL) up 11% for the week, Fastly (FSLY) up 3.8% for the week, Peloton (PTON), Livongo Health (LVGO) Cloudflare (NET), Okta (OKTA), Coupa (COUP),The Trade Desk (TTD), Zoom (ZM), Zscaler (ZS), Snap (SNAP), among many many others.
Summary:
By just observing the above 3 scenarios we can get an idea of what the market is going to do next. Thus far I am leaning towards the case that this so far is a normal 5% pullback in an ongoing trend. But if we see the NASDAQ losing its 20-day line, S&P 500 below 3000, widely held and growth stocks losing key levels, we might be in for a larger and deeper correction. So stay observant, stay flexible and keep an open mind as to the possibilities. If you have any questions, please e-mail us at info@crosspointwealth.com.