Last week’s equity price action left investors of all stripes and sizes with an ageless reminder: what goes up must come down. And though last week’s price action was particularly painful for investors with overweight exposure to the information technology, health care, and consumer discretionary verticals, the retreat was efficient, healthy, and relatively orderly. Volume did accelerate across the board – indicating some meaningful institutional sponsorship was present.
Though it may seem counter-intuitive, given the efficiency of last week’s retreat, in the bigger picture, last week’s sell-off was a blip on the radar. There are several significant and potentially constructive points to keep in mind as we head into this holiday-shortened trading week.
Firstly, as the charts below illustrate, all three major equity market indices open this week only modestly below their respective 52-week highs. And, as of the close last Friday, the Dow Industrials are only 5% off their 52-week high. The Nasdaq Composite stands at 6% from its 52-week high, and the S&P 500 is 4% off the same benchmark.
Given all the handringing and fear that gripped markets last week, we open this holiday-shortened trading week in relatively solid technical shape as far as the major market indices are concerned.
Secondly, the pullback that materialized last week had the effect of reducing the spread between the 50 DMA’s and their respective closing prices. This healthy compression has the potential of fueling a more sustainable rally in the coming weeks – though there certainly are quite a few variables at play, and no certainty of near-term direction.
Thirdly, there were some healthy intraday reversals posted by all three major indices on Friday. The most glaring example of an impressive reversal can be seen on the Nasdaq Composite chart. Though the Nasdaq did register a loss of 1.27%, or 144.97 points on Friday, it rallied sharply from its respective 50 DMA on its way to regaining much of its intraday losses. Neither the Dow Industrials nor the S&P 500 came close to violating their respective 50 DMAs, though both also sported meaningful intraday reversals.
Though recent growth stocks are likely to remain a target of continued net institutional selling as a way of locking in gains, managing downside portfolio risk, and raising capital for asset reallocation, there have been notable signs of technical strength in several of the most recent fastest-growing stocks. Among those names are Apple, Amazon, Square, and Zscaler. Many familiar growth stocks managed to find support at key levels last Friday. Those key levels include 21-day lines for Facebook and Nvidia. As you know, I have been calling for the Dow Industrials and the S&P 500 to close the gap in YTD performance with the Nasdaq Composite. That was fully realized last week as a result of our two-day sell-off.
As I touched upon in the opening paragraph of this morning’s note, the information technology, health care, and consumer discretionary verticals have provided significant gains for investors from the March 29th lows. Those gains were impacted by last week’s pullback, as expected. However, in the bigger picture, nearly all of the same issues open this week with enormous YTD gains. Health Care darling, Moderna (MRNA), still has a YTD gain of 231.7% and a composite rating of 79, though it is 31.9% off its all-time high. Zoom (ZM) opens this morning with a YTD gain of 460.4% and sports a composite rating of 99, despite closing on Friday 20.2% off its all-time high. DocuSign (DOCU) opens this morning up 226% on the year, sports a composite rating of 99, and is 16.6% off its all-time high. And there are many other leaders equally well-positioned, including Nvidia (NVDA), Peloton (PTON), and Apple (AAPL).
Legendary Wall Street figure, fellow Buttonwood Club member, and dear friend Art Cashin made two very interesting points in a letter I received this Labor Day weekend. Price actions around stock splits, two of which we have seen recently, Tesla and Apple, seem to mystify people. Why would a company share price rise if the only factor of mathematical significance in a split is a greater number of shares in the market? That price appreciation of the stock is being driven by traders covering shorts both before and after the split. Covering requires purchases. Purchases in great enough scale equal higher stock prices. Secondly, Art goes out of his way to make a point of historical significance in regards to this time of year: the calendar. The end of August oftentimes show signs of topping. If last week’s price action is any indication, we may have registered a short term top. Art goes on to say: “August into September has frequently in the past brought changes in the market’s sense of direction.”
Last Week’s Economic Calendar Highlights:
ISM Manufacturing Index reading for August came in stronger than Econoday consensus was expecting. July’s reading was 54.2. Econoday was calling for 54.5. The actual reading was 56.
The Goods and Services Trade figures for July were released at 8:30 am. The results were not good, though it is only a one-month snapshot. June’s totals were revised up from $-50.7 B to $-53.5 B, and July’s reading was $-63.6 B. Jobless Claims for the week ending 8/29 dropped more than expected. The previous week’s report was revised to 1,011 K from 1,006 K. The actual results for this week’s report dropped to 881 K. As a result, the four-week moving average dropped by a healthy 130 K. This is certainly very welcome news.
The Monthly Employment Report for August was released at 8:30 am, and reflected significantly larger gains in employment than nearly anyone expected. Econoday consensus was calling for a topline reading of 1,4000,000. The actual was 1,371,000. Even more impactful for those looking to use this data for political gains was the drop in the official unemployment rate to 8.4% from July’s 10.2%. There is no way around it. That is enormously good news for the US economy and the US labor force. The topping on the cake came in the jump in hourly earnings by 0.4% for the month. The year-over-year reading is a very solid 4.7%, which is well above inflation, reflecting a continued trend of increasing purchasing power for US consumers. The LFPR ticked up to 61.7% from 61.4%.
Flickr photo: by Alfonso Jiménez
Kenny’s Commentary subscribers receive the note in their inbox Monday’s before the US markets open plus full economic calendar, media, charts, Mark Sutin’s Insights, Tortoise Advisors strategies, and Sam Stovall’s analysis: Subscribe