It is interesting to note that the stock market was already giving back a lot of yesterday’s midday gains before the market closed...and before the earnings from several high profile tech companies. Don’t get us wrong, the decline over the last hour and a half of yesterday was not a disaster, but the S&P did give back about 45% of its gains by the close. We’d also note that the breadth on the S&P 500 went from almost 7 to 1 positive at 2:30 to just 2.4 to 1 positive at the close of trading.
The disappointing earnings reports out of those tech names (led by AAPL and AMZN) have the S&P futures trading down by about 30 points as we write...and the Nasdaq futures are down by more than 1%. However, the bond market is not reacting very much to this decline...which has been true all week...despite some pronounced weakness in the stock market. This does not surprise us very much. During the severe decline of the spring, bond yields dropped significantly in a “flight to safety” move. That made perfect sense...as people worried about how many companies might go out of business due to the global pandemic. This time around, people are worried about whether the results of the election...or the inability of Congress to pass a new fiscal plan...or further lockdowns in Europe & the U.S...will dampen economic and earnings growth. So the concerns are not quite as serious.
Let’s face it, the disappointing earnings we got from several tech companies last night is certainly not raising concerns about whether any of them will survive going forward. In fact, 99.9% of investors KNOW that all of these tech companies will THRIVE going forward. They are GREAT companies with GREAT futures. The only question right now is whether the election, fiscal policies or lockdowns will cause these expensive stocks to give-back some more of the HUGE gains they have garnered in recent years......In other words, these stocks could fall quite a bit further...and this expensive stock market could do the same...without causing investors to worry about the concerns that were at the forefront of their minds in March and April! Individual stocks...and the broad market...CAN decline in a meaningful way without it signaling a major debacle! Therefore, this week’s divergence between the stock and bond markets is not as surprising as some would make it out to be.
In other words, this week’s action gives us some good news and some bad news. The good news is that the decline we’re seeing this week is probably not something that will raise concerns about anything systemic...or that we’re headed for another deep down-turn in economic growth. However, the bad news is that it just might be telling us that economic growth and earnings growth are going to slow (at least somewhat) once again...and that’s not good for a stock market that is already expensive. So although this week’s decline is unlikely to be signaling the beginning of a bear market, it could still easily give us a full blown correction before the stock market sees a meaningful bottom.
There are a million things to focus on today. Surprisingly higher yields, the higher dollar, the lower Aussi dollar, much lower oil prices, weak European stocks, political polls, etc, etc...are all on people’s minds (and rightfully so). However, since we’ll be discussing all of these issues (and some others) in our weekend piece, we’ll limit our focus this morning to three individual stocks...AAPL, MSFT and AMZN. If these stocks can hold their key support levels over the next few days...and can bounce-back in a nice fashion, it’s going to be quite bullish for the market. If, however, they break below those levels, it should be telling us that a full 10% correction will take place before we see a meaningful post-election bottom.
We’ll start with AAPL...and we’ll be quite quick with this one since we highlighted it just yesterday morning. It is trading below its trend-line from March and below its closing low from Wednesday in pre-market trading. So the September lows of $106.84 is the key level we’ll be watching today...and next week. (First chart below.)
MSFT has already reported, but it is down a couple of points in sympathy with the other tech names. If you’ll remember from our charts from almost two weeks ago, the $200 level is the key level in this stock. That is the “neck-line” of a “head & shoulders” pattern...and just $2 below where it is trading this morning. Thus any meaningful break below that level will be quite bearish for MSFT on a technical basis. (Second chart)
As for AMZN, it’s down as well this morning, but it is further away from its key support level. That level is $3000...and it’s still 5% below where it is trading in the pre-market so far today. Therefore, it is unlikely it will test that level immediately, but it is not out of the question that it could test that level at some point in the next week to ten days. Like the $200 level on MSFT, the $3,000 level is the “neck-line” of a “head & shoulders” pattern, so a meaningful break below that round number over the coming days or weeks will not be good at all for the stock on a technical basis. (Third chart.)
Again, any significant bounce off of these important support levels will be very bullish for these stocks...and the broad stock market.
To repeat, all three of these companies are GREAT companies!!! However, sometimes the stocks of great companies can get well ahead of their underlying fundamentals...and need to pull-back in a material way. If (repeat, IF) AAPL, MSFT and/or AMZN break the above mentioned key support levels in any significant way, it should be telling us that the correction in the mega-cap tech space has further to go.......This is not 1999/2000 by any means, but that does not mean the stocks of these great companies cannot fall further before they see a convincing bottom.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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