Yesterday the stock market got hit hard after the opening bell with selling led by big cap technology stocks. The S&P 500 managed to bounce a little bit into the close and succeeded to close above its 50-day moving average. If you can remember a week ago on Friday I said that the market had to rally off of this level this week and it did, but now we are back on it as you can see from this chart.
The media must come up with explanations for every gyration in the market and an article on CNBC declared last night in a headline that “The market isn’t convinced the Federal Reserve can achieve its inflation objective.” I don’t believe that is why the stock market dropped and I’ll give you my reason in a second. First you need to realize that while the S&P 500 closed on its 50-day moving average many of the big cap technology stocks that have been leaders and drivers of this stock market rally gapped down below their 50-day moving averages on Thursday and closed below them!
For instance take a look at shares of Amazon (NASDAQ: AMZN).
This is a classic “tear drop” pattern. It happens when a stock opens below an obvious support level, which for Amazon was the 3100 level. This causes people who set stop loss orders right on the support level to feel like crying and if the stock fails to rally back up the day it happens the stock becomes broken.
The same thing happened with other stocks like FB, AAPL, and GOOG yesterday too. It doesn’t mean we’re going to see the market crash like it did in March, but that the momentum is no longer to the upside like it was in early August. It means the overall trend for now is going to be sideways to down.
It could be like this into the election. I know a lot of people are expecting a big election dispute or controversy over the results and President Trump is even making statements to the effect that no one may ever know who the winner is helping to make people worry even more. Some are saying the market will drop after the election as a result – but that is not how markets work. Traders trade AHEAD of news like that. That’s why this week the market rallied INTO the Federal Reserve meeting Wednesday and then traders sold it. The implication is if the election is truly going to be a negative event for the financial markets then traders will sell BEFORE and INTO the election instead of just sit there and then wait to panic. Personally I don’t think any controversy will last but a few days, but it’s people’s worries that matter here and so many people are scared or stressed out right now.
But the biggest reason (the real one) for the recent weakness in the stock market is a very simple one. Take a look at this chart of the Nasdaq 100 (NASDAQ: QQQ), which also closed below its 50-day moving average yesterday.
From its March low to Labor Day the Nasdaq 100 and the entire stock market had a tremendous rally – it was one of the largest rallies in such a short amount of time ever in the history of the stock market. In fact the 90 day rate of change indicator for the Nasdaq 100 even hit a record level.
The momentum of the market rally going into Labor Day simply became unsustainable as it almost doubled in price in less than six months. For it to go on like it was the stock market would have to almost double again by March.
In 2009 when the stock market bottomed the Nasdaq 100 doubled in about a year. It then took it over four years to double again. It takes time for a market to make gains like that – and this market was not going to do it again in six more months.
And so it stalled out.
That’s why the Nasdaq has fallen roughly 10% off of its highs.
No one wants to tell you that, because they are afraid you’ll get mad at them, but this is what happened.
So it’s time to be cautious. It doesn’t mean the market is going to crash, but it does mean some of these gains from March are likely to be retraced. Just take a break if you are a big cap tech trader.
And something is always going up. There was a big asset class (with stocks associated with it) no one talks about that went up Friday. And silver and gold are in simple consolidations ready to run no matter what the market does. In the Fall of 2018 when the S&P 500 fell 20% they went up and this morning gold is up $10.00. Silver can breakout any moment. There are so many better ways now to make money than buying TSLA.
And gold and silver fell less than the stock market did in March when the market crashed and have been beating the market in terms of performance year to date all year. Silver and gold are less volatile than the S&P 500 is and are in a position to go up for years thanks to their charts and these Federal Reserve policies. That’s what I’m focused on.
-Mike
