February 28, 2021: It was a rough week for stocks around the world. Even before the U.S. market opened on Friday, Hong Kong's Hang Seng has dropped 3.4%, while Japan’s Nikkei was down 4%. It was the worst decline in the Hang Seng in nine months. In just one week. The focus of investors has changed, as "Investors are now fixated on the risk of inflation and economic overheating," said Tai Hui, chief Asia market strategist at JP Morgan Asset Management.
One of my favorite momentum indicators, the Moving Average Convergence-Divergence, has been pointing towards higher yields for the 10 Year T-Note since June of 2020. Last week, I noted the “rapid increase in yields may create worry among investors”. The yield pulled back on Friday, closing at 1.460%, which was sharply higher for the week but below the week’s high at 1.614%.
Large tech stocks were down this week on concerns over how yields will impact earnings, leading the Nasdaq 100NDAQ to fall 4.9%. The Dow Jones Utility Average was even weaker, down 6%.
Both the SPDR Gold Shares and iShares Russell 2000 were down 3.1%, but the declines were not quite as severe in the Dow Jones Industrial Average or the S&P 500. Only the Dow Jones Transportation Average was able to close higher, up 0.4%.
After last week’s selling, both investors and traders are likely wondering whether the market bottomed last week, or if further selling is needed before the correction is complete.
The Invesco QQQ Trust (QQQ)QQQ had a low on Friday of $310.88. This is just below the 38.2% Fibonacci retracement support level at $310.96, which is based on the rally from the November 2020 low. The Tuesday low was $311.00. There is further support at $310.58 and then at $305.18, which is the low for 2021 so far.
The daily starc-band was tested each day last week. The weekly starc- is at $302.64, which is close to the 50% support level at $302.58. With QQQ at the daily starc- bands, a rebound is likely this week. The declining 20-day exponential moving average (EMA) is at $324.76, and last week’s high is at $327.80. On a rally, these levels are strong resistance.
The Nasdaq 100 Advance/Decline line dropped below its weighted moving average (WMA) last Monday as the support from December (line a) was violated on Thursday. The next support, from the October/November lows (line b), has now been reached. The On Balance Volume (OBV) has been weaker than the A/D line. It dropped below its WMA on Monday, and then broke below the support from the December lows (line c).
Those investors who may have the most regrets after last week’s action are those who bought some of the large tech stocks just ahead of their earnings. The table reviews four of the tech giants, when they released earnings, when and where they made their highs, and how far they have declined from these highs. The QQQ data is provided for comparison
AppleAAPL (AAPL) made its high on January 25 at $144.87, and then on 1/27 reported what CNBC described as a “blowout quarter, booking more than $100 billion in revenue”. It traded down 2% in after-hours trading, despite a number of analysts praising their earnings report with terms like “A masterpiece quarter”. As of Friday’s close at $121.26 the stock is down 19.5% from the pre-earnings high.
For many, buying a stock or a call option just ahead of earnings has been a popular strategy, with the fear of missing out acting as the primary motivator, instead of an objective appraisal of the risk. This chart of the March 19 - 140 call for AAPL reveals that on 1/25, two days before earnings, the option opened at $11, and traded as high as $12.22 before closing at $10.94.
The call option failed to make a new high on 1/27, closing at $11.11. The next day the option closed at $7.05 despite the blockbuster earnings. Five days later on 2/3, the option closed at $3.99. As of Friday’s close, the option was worth just $0.30.
Both Amazon.com (AMZN) and Facebook (FBFB) also reported very strong earnings, but made their price highs the day after reporting earnings that were also hyped in the media. They are also both down around 11% from their post-earnings high, as they have had sizable corrections already.
TeslaTSLA (TSLA) reported on 1/27 that it missed on earnings, but the revenues were better than expected. The stock peaked on 1/25 at $900, but dropped to $805 in after-hours in reaction to its earnings. It had a low of $619 on Tuesday and closed the week at $675.50, down 33.2% from the high.
I believe that the recent stock performance of the tech giants is one more cautionary tale against reliance on fundamental analysis. Strong performance by a company simply does not have predictive power for how its stock will perform. This is a lesson I learned early in my career as a student and analyst of the stock market, and what led me to technical analysis. I determined that forecasting future prices through the analysis of past price and volume data is much more reliable (though not infallible).
The current earnings season has been better than most expected. For the 4th quarter of 2020, FactSet reports that “79% of S&P 500 companies have reported a positive EPS [earnings per share] surprise”. A similarly-high percentage have reported a surprise on revenues, but as noted in the table above, the high-growth Invesco QQQ Trust (QQQ) is down 7.6% from its high.
For a number of weeks, I have been cautioning that the high degree of investor complacency and too-high level of bullish sentiment by investment professionals made the market vulnerable to a correction. So far the current correction has not yet relieved these concerns.
My analysis suggests that the market is close to a short-term low, but then it will be the strength or weakness of any near-term rally that will provide insights on whether a sustainable bottom could be in place. Historically, after a powerful rally like the one we've had from the September/October lows, a correction of 3-5 weeks is more likely. I will continue to monitor the advance/decline numbers for a confirmation that the correction is over.
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