Prepare for Rough Markets Ahead?

Fred Imbert and Jesse Pound of CNBC report the Dow rallies more than 300 points on Friday as tech shares bounce, cutting losses for the week

U.S. stocks rose on Friday, recovering some of their losses for the week, as tech shares clawed back some of their big September declines. 

The Dow Jones Industrial Average closed 358.52 points higher, or 1.3%, at 27,173.96. The S&P 500 climbed 1.6% to 3,298.46. The Nasdaq Composite popped 2.6% to 10,913.56. It was the best day for the major averages since Sept. 9.

Shares of Amazon rose 2.5% and Facebook gained 2.1%. Apple advanced 3.8% and Microsoft climbed 2.3%. Netflix closed 2.1% higher. The S&P 500 tech sector jumped 2.4% and for its best day since Sept. 9, when it popped 3.4%.

Cruise operators also contributed to Friday’s gains. Carnival, Norwegian Cruise Line and Royal Caribbean were up 9.7%, 13.7% and 7.7%, respectively, after an upgrade from a Barclays analyst

The “sell-off has stabilized a bit over the last few days, but there are still no real signs of strength,” said Mark Newton, managing member at Newton Advisors, in a note. “Thus, the trend remains bearish and not much to bet on a rebound.”

Both the Dow and S&P 500 posted four-week losing streaks, their longest slides since August 2019, despite Friday’s rally. The Dow lost 1.8% this week and the S&P 500 closed 0.6% lower week to date. The Nasdaq Composite had its first weekly gain in four weeks, rising 1.1% over that time period. 

That mixed weekly performance followed concerns around the state of the U.S. economic recovery as well as uncertainty around a new fiscal stimulus bill. 

House Democrats are preparing a $2.4 trillion relief package that they could vote on as soon as next weeka source familiar with the plans told CNBC. The bill would include enhanced unemployment benefits and aid to airlines, but the overall price tag remains well above what Republican leaders have said they are willing to spend. 

The major averages have had a tough month, with the S&P 500 falling 5.8% in September. The Dow has dropped 4.4% over that time period and the Nasdaq is down 7.3% month to date. 

Much of September’s losses have been concentrated in mega-cap tech stocks, which carry a heavy weight in the indexes. Shares of Apple — the largest publicly traded company in the U.S. by market cap — have dropped 13% this month. Microsoft, Alphabet, Netflix, Amazon and Facebook are all down at least 7.9% over that time period. 

“After a buoyant and hopeful summer, financial markets are cooling in the face of reality,” strategists at MRB Partners said in a note. “High-flying tech and tech-related stocks are in a full-blown correction, and weakness has recently spread to broader indexes, with a distinct smell of risk-off in the air. We had expected a gradual, albeit choppy, economic recovery, but it appears that some investors were not prepared for setbacks along the way.”

Russ Koesterich, managing director and portfolio manager at BlackRock, said on CNBC’s “Closing Bell” on Thursday that his team took profits in some high-flying tech stocks at the end of August and then were buying more cyclical stocks during the recent drop for the market. 

“What we’ve been trying to do in recent weeks is take the cyclical exposure up a little bit ... it’s not that we think tech is going to roll over. We still like the themes. But on a shorter-term tactical basis, we’re comfortable with the economy, we think we’re going to continue to see improvement, and we’re looking for names that are levered to that improvement,” Koesterich said.

It's Friday, my time to leave pensions aside and analyze markets.

Stocks ended on a positive note, literally melting up Friday afternoon, led by tech shares.

But it was a choppy week with stocks getting slammed earlier this week.

For the week, here is the performance of major S&P market sectors: 


The first thing you will note is Energy (XLE) got slammed hard this week, down 8.6%.

Last week, I wrote a comment on Big Oil for the long run and told my readers while I like the prospects of giant oil companies over the long run, in the short run, we can get a final washout.

How low can these oil stocks go? That's anyone's guess but they're hitting multi-decade lows here:

What I think is happening is the quant/ momentum managers are still shorting the sector hard and the fundamental/ value managers are quietly accumulating energy shares here.

The other issue I have is ESG funds buying mega-cap tech shares, contributing to the tech bubble, and ignoring any stock in the energy index.

When will this silliness stop? Again, your guess is as good as mine but it's clear energy shares (XLE) are under immense pressure and we can see a retest of March lows or worse:

That's why it's critically important to always be disciplined and never invest more than a certain percentage of your portfolio in any stock (say 5%), you just never know how low prices can go.

If I were to hazard a guess, I'd say there's a major carry trade that has been going on for a few years, Long Tech/ Short Energy and this is still the trade large leveraged funds are betting on.

Thing with carry trades is when they blow up, they blow up spectacularly, especially in a zero-bound world.

On technology, I remain bearish and looking at the Nasdaq 100-Index (NDX), I can see it's hovering right below its 50-day moving average:

When I step back and look at the 5-year weekly chart, I see the potential for a much more meaningful sell-off in tech shares:

Notice that on this weekly chart, I purposely chose the 10, 50 and 200-week moving averages and for a reason.

When we had the huge liquidity melt-up since bottoming in March, the index never broke below its 10-week moving average. 

This week it did and it remains to be seen if this is a tiny blip or something more meaningful.

If tech stocks do start selling off again, I want to look at the 50-week and 200-week moving averages because if it goes below the 200-week, we're in a full blown bear market that can last years. 

That's the problem with this market, tech is so dominant, it literally brings the entire market up or down with it. 

And while everyone is fixated on Apple (APPL) and Microsoft (MSFT) which together make up 43% of the S&P tech Index (XLK), there are many other tech companies which are flying this year, like Square (SQ) and Crowdstrike (CRWD), just to name two.

Moreover, this week, cloud computing ETFs (WCLD and CLOU) took off led by companies like Zoom (ZM), Zscaler (ZS), Fastly (FSLY), Twilio (TWLO), Docusign (DOCU), and Shopify (SHOP). 

Many of these were among the best-performing large cap stocks this week:

Just have a look at Zoom (ZM) shares, after a big pullback, they're making new highs, in full beast parabolic mode:

I wouldn't touch this stuff with a ten-foot pole but elite hedge funds front-running this market are trading them and making a killing. 

Speaking of elite hedge funds front-running the market, I saw this earlier today:

Here's what I wrote on LinkedIn:

"There’s a reason why Ken Griffin is the undisputed king of hedge funds. Not only is he smart as hell and hires top talent, he literally controls almost half of all retail trading, giving his firm unprecedented knowledge of total retail positioning. Doubt Ray Dalio will bring this up in his rants on capitalism."

Earlier his week, I took on Dalio and his thoughts on capitalism and basically called him out on a few things but most important, the Fed bailed him and other elite hedge fund managers out and he's incapable of admitting this.

Alright, what else? Here are some other interesting stories I read this week:

There definitely is no magic strategy to protect you from extreme volatility in these markets.

That's what happens when rates are at zero and the Fed and other central banks are manipulating markets.

The second wave of COVID is here, will it cause another bear market, that remains to be seen but I think that all market participants are realizing the initial "liquidity thrust" and fiscal stimulus is wearing off and reality is setting in. 

As for the next financial crisis, here's is what I shared on LinkedIn:

"Everyone is hailing policymakers for their quick and decisive response, both monetary and fiscal. Policymakers are trying to buy time hoping the economic recovery will gain momentum. Great if it works but it will still be the most anemic recovery ever. Worse still, what if it falters as the stimulus ends? Then you have to look at the weakest links and in my opinion, it’s in a few emerging markets. A massive EM crisis will send shock waves throughout the global financial system because it will be highly deflationary. "

Maybe that's why European bank shares hit an all-time low today, because they're heavily exposed to EM markets:

Don't worry, I'm sure the Fed and ECB are on it, increasing their already bloated balance sheets.

But my advice is prepare for rough markets ahead and manage your risk accordingly.

Below, stocks fell sharply on Monday as fears about the worsening coronavirus as well as uncertainty on further fiscal stimulus rattled traders. CNBC's "Halftime Report" team discussed how they're investing amid the trading session's market sell-off.

Also earlier this week, Morgan Stanley's Chief US Equity Strategist Mike Wilson joined CNBC's Halftime Report team to discuss markets and why he sees a further correction.

Late this afternoon, CNBC's Fast Money traders gave their final trades for the week. I agree with the guys who are short emerging markets (EEM) and long volatility (Jan calls on UVXY).

Lastly, Nassim Taleb, New York University distinguished professor of risk engineering, discusses what he sees as misconceptions about the coronavirus pandemic and comments on the Federal Reserve's shift in monetary policy. He speaks with Bloomberg's Erik Schatzker. Take the time to watch this. 

By the way, as far as tail risk and Universa, I wish they'd state their performance inception-to-date, not just when they're hitting grand slams.