Markets Struggle to Find an Equilibrium?

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Fred Imbert of CNBC reports the Nasdaq closes lower to end its worst week since March as tech continues to struggle:

The Nasdaq Composite fell in another volatile session on Friday as the continuing tech sell-off drove the benchmark to its worst week in months. 

The Nasdaq closed 0.6% lower at 10,853.55. At its session high, the composite rose as much as 1%; it was down more than 1.7% at one point as well. Apple dropped 1.3% and Amazon fell by 1.9%. Facebook, Alphabet and Microsoft were all down.

Tech selling briefly picked up after Bloomberg News reported, citing sources, that SoftBank was considering changes to its options trading strategy. Last week, SoftBank was identified as the “Nasdaq whale” that bought billions in stock options in a bet for higher prices in Big Tech. 

The S&P 500 eked out a small gain after gyrating between solid gains and steep losses. The broader-market index closed about 0.1% higher at 3,340.97. Meanwhile, the Dow Jones Industrial Average ended the day up 131.06 points, or 0.5%, at 27,665.64. The 30-stock average was up 294.24 points, or 1.1%, at its session high and fell as much as 86.46 points. 

“Markets continue to struggle finding an equilibrium,” said Mark Hackett, chief of investment research at Nationwide. “This market is more akin to the emotional swings of March and April than in recent months. We are likely to continue in a period of directionless volatility as bulls and bears wrestle between the strong Fed liquidity and improving economic backdrop and the continued uncertainty and elevated valuations.”

All three of the major averages posted steep losses for the week. The Nasdaq fell 4.1% week to date for its biggest weekly decline since March. The S&P 500 had its worst one-week performance since June, falling 2.5%. The Dow fell 1.7% this week. 

“The next couple of sessions will be crucial in judging the possible extent of the pullback, and bulls will be looking for signs of positive divergences as the major indices approach their 50-day moving averages,” said Ken Berman, strategist at Gorilla Trades.

Big Tech was also down sharply week to date. Facebook and Amazon each lost more than 5% this week. Apple and Netflix slid 7.4% and 6.6%, respectively. Alphabet and Microsoft were both down more than 4% week to date. Tesla, meanwhile, plunged 10.9% this week. At the S&P 500 sector level, tech fell 4.4% week to date for its biggest one-week loss since March.

Wall Street was coming off a session in which the major averages closed sharply lower after a steep downturn in tech names. Those losses came after the benchmarks gave up solid gains. 

Douglas Busch, founder of ChartSmarter.com, said a “hallmark” of a healthy market is closing near its high after a weak start. “The opposite of that action could be the definition of how the benchmarks fared Thursday,” he said.

“Decent early gains quickly faded, and as many stated last week’s lows were critical to hold,” Busch said in a note to clients. “Perhaps, for the first time in a while, we can say advantage bears.”

The market is on track to post big losses for the holiday-shortened week. The Dow is down 1.6% this week while the S&P 500 has fallen 2.4%, set for its second straight weekly loss for the first time since May. The tech-heavy Nasdaq has dropped 4.2%, and is headed for its worst week since March.

Consumer prices jump in August

The Labor Department said Friday its U.S. consumer price index rose by 0.4% in August. Eonomists polled by Reuters expected an increase of 0.3%.

That larger-than-expected advance was driven the biggest cost increase for used cars and trucks in more than 51 years. 

“The resurgence in economic demand following the pandemic lock down has turned the direction of consumer prices on its head with pent-up purchases from the consumer dramatically changing the deflation trend to an inflation trend,” said Chris Rupkey, chief financial economist at MUFG. 

It's Friday, time to kick back and look at this week's market action.

If you haven't done so, you should begin by reading last week's market comment on when Nasdaq whales get slaughtered. 

A lot of the price action this week has been textbook in the sense that after three days of selling, the Nasdaq bulls came in to defend the 50-day moving average on the Nasdaq-100 index (NDX):


It's pretty much the same thing for the S&P 500 ETF (SPY) which is heavily weighted toward tech (roughly 30%):


So, where do we go from here? It's important to note six mega cap tech names make up 50% of the Nasdaq-100 index and even more if you include the top ten constituents, that's why bulls keep looking at the same stocks to gauge the strength in the Nasdaq:


As you can see, it wasn't a great day for the Nasdaq's top hitters and that leads many market commentators thinking the big tech rally has "exhausted itself" and there's a "healthy rotation going on out growth into value".

The problem with that argument is I don't see it this week in the S&P sector performance:


In fact, Energy (XLE) got hit hard this week, down 6.7% (these are all price, not total returns), followed by Tech (XLK) which slid 5.7%, and the only sector which posted a gain was Materials (XLB), up 1%.

Of course, given the dominance of tech in the overall market, everyone is focused on this dominant sector. 

Andrea Cicione of TS Lombard wrote a comment stating the tech selloff may soon be over - but for how long?:

Bubble behaviour is clearly visible in the marketplace… Calling the top of a bubble is as hard as winning the lottery. The signs of the mature stage of bubble formation are becoming increasingly evident – leveraged risk taking being the main one. However, the surge in call buying that propelled the S&P 500 and Nasdaq to new highs seems to have started only in late July (see bottom-right chart). This suggests that the risk overhang may not take much longer to unwind.

…but the leverage accumulation so far may not be enough to burst the bubble just yet. If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk. The Nasdaq experienced three 17%+ selloffs between 1997 and 1998, only to remerge stronger every time and rise four-fold from the last of those selloffs to the 2000 peak. Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet.

Whether or not there's been enough leverage for the dot-com 2.0 remains to be seen, but one thing is for sure, there's plenty of speculative activity and that hasn't subsided which tells me there's more volatility ahead:

And while some well known bulls aren't concerned, one smart quant who correctly predicted last week's rout says the selling isn't over:

Sure, all of the stocks in the FANG+ index have moved out of overbought territory and are now neutral or oversold, but that doesn't mean they can't become more oversold:

Just have a look at how oversold and undervalued global value stocks have become:

Of course, the liquidity guys are telling you there's ample liquidity to drive PEs a lot higher:

In fact, Jeroen Blokland, Multi Asset Portfolio Manager at Robeco, posted this on LinkedIn:

Equities should be trading at a PE of 100! 

Well at least according to one metric. Today’s chart depicts the relationship between excess liquidity, measured as the difference between money supply growth and growth in nominal GDP, and the PE of the S&P 500 Index. The idea behind this is that if there is more money being created than needed for economic growth, in case of excess liquidity, this will find its way into the stock market. The positive relationship between the two lines, the rise in excess liquidity coinciding with the rise in PE, underpins this assumption. Currently, growth in excess liquidity is unprecedented. This is not so surprising considering the Federal Reserve has increased its balance sheet by trillions of USD. It would take a PE of 100(!) for the two lines to converge. Obviously, this is not going to happen, also because nominal GDP growth is expected to bounce back sharply. But it does point out that from a liquidity perspective, valuation looks far from stretched.


I couldn't resist a snide remark:

I surmise you can find many indicators to make up a fairy tale about how tech stocks are only beginning to bubble up but in the end, the market has the final say and the Tech/ momo crowd will get crushed. Be very careful reading too much into this liquidity indicator.

One young analyst posted a nicer comment on LinkedIn:

Very interesting chart, Jeroen! Quoting Martin Zweig’s timeless statement from ‘Winning on Wall Street’, “the monetary climate - primarily the trend in interest rates and Federal Reserve policy - is the dominant factor in determining the stock market’s major direction”

Sure, don't fight the Fed, Marty Zweig, David Tepper, Stanley Druckenmiller and many others have been making a killing over the years reading the tape based n the Fed.

But the Fed has been tapering its asset purchases lately, admittedly nothing huge, and it doesn't seem too concerned about tech stocks selling off. Also, with an upcoming election, it might sit on the sidelines for now.

Speaking of Druckenmiller, he was on CNBC earlier this week warning the stock market is an 'absolute raging mania' and that inflation could reach 10%:

Well, I agree with the first part, not the part on inflation:

Druckemiller is a trading genius, he holds the best long-term track record ever, but he's not always right:

And neither are his hedge fund buddies buying the dip on tech stocks:

There's a reason why portfolios of connected hedge fund managers overlap by as much as 50 percent more than the average. According to new research, they share information which isn’t surprising to those of us who have been tracking their holdings very closely over the years:

Here is what I shared on LinkedIn:

Professional allocators are typically looking for uncorrelated alpha because beta is cheap. What this study demonstrates is there is a lot of herding going on in L/S Equity funds and some multi-strategy funds, which works well when the tech stocks are going to the moon (most of them take concentrated bets in tech stocks), less well when tech stocks are getting slammed. My thinking with hedge funds is why pay 2&20 to a group of hedge funds doing the same thing? If you're going to pay fees, make sure it's to hedge funds which consistently deliver uncorrelated alpha in all market environments (not easy to find them but they exist).

If you don't believe me that there's a lot of herding activity among hedge funds, go check out what top finds bought and sold in Q2.

Anyway, I'm rambling, Here are the top performing large cap stocks this week:


And the worst performing large cap stocks for the week:


As you can see, it wasn't a good week for energy and tech stocks and Lululemon (LULU), down 17% this week but keep it under perspective, the stock ran up a lot since March lows as did another market darling, Peleton (PTON):



I'd be shorting both these stocks on further weakness, think there's a lot of hot air that needs to be let out of these stocks and many more in this ridiculous market that seems to favor dummies:

Alright, let me wrap it all up here, this Friday, September 11th.

I can't believe it has been 19 years since the 9/11 terrorist attacks. It is a sad and somber day but let this story bring some solace to some of those who suffered tragic losses that day:

Below, the stock market is in a mania fueled by the Federal Reserve and investor speculation that will end badly in the coming years, longtime hedge fund manager Stanley Druckenmiller told CNBC's "Squawk Box" on Wednesday.

Second, Degas Wright, Decatur Capital Management chief investment officer, and Steve Weiss, Short Hills Capital, join 'Fast Money Halftime Report' to discuss what's driving the markets and Peloton.

Third, and most important, Jonathon Krinksy of BayCrest Partners joined CNBC's "Halftime Report" Thursday to talk about the trends he is seeing in the market action. Pay very close attention to what he said, it's very insightful from a technical point of view.

Lastly, US commemorates 9/11 with mournful ceremonies and by remembering and honoring the men, women and children killed in the attacks at the World Trade Center site, the Pentagon, aboard Flight 93, and those who died in the February 26, 1993 WTC bombing.

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