Key points to remember:
- Stocks on pace for worst month in almost a year after another performance-linked sell-off
- Washington concerns also weigh as Powell testifies on inflation, infrastructure vote looms
- Volatility rises a wave of worries towards last week’s highs, technical picture eases
Investors are probably expecting Friday longer than usual this week.
That’s because Friday marks the start of a new month, ending what was a disappointing and ugly September that worsened on Tuesday as rising Treasury yields and a volatile situation in Washington took hold. is wreaking collective havoc.
September is now on the way to be the worst month for S&P 500 Index (SPX) since last October. The index is down more than 3% since the start of the month. It’s also a reminder of how rising Treasury yields and concerns about rising rates can hurt “growth” sectors like technology and communications services. Investors may recall similar times earlier this year and in the fall of 2018, when rate concerns led to tough times for tech.
These worries also helped push volatility up to its level just over a week ago during the last sell-off. The Cboe volatility index (VIX) topped 23 today, down from around 18 at the end of last week. Typically, it has pivoted towards 20 over the past few months, and anything approaching 25 could signal growing concerns about further turbulence to come. At 20, you start to notice the VIX, and a VIX of 30 can send a strong bearish signal.
In what could be a bearish move on Wednesday, a small comeback about an hour before the close encountered new selling pressure that took the major indices a glaring distance from their intraday lows. Late selling could suggest an interesting first half hour tomorrow morning if there are any other sell orders to process. What happens next could set the tone.
10-Year Yield Makes Headlines, But Others Are Even More
Everyone seems to have their eyes on the 10-year Treasury yield, now above 1.5% and three-month highs. That’s an incredible 24 basis point increase in less than a week.
But two- and five-year yields are also on the rise. At 1.02%, the five-year yield is up an astounding 183% year-to-date, beating the 68% rise in the 10-year yield this year. This means that the “curve” between the two narrows, although it remains relatively wide. As they say in England, “Watch out for the gap” because if the curve continues to narrow it may suggest a more difficult road for the economy.
Another sign of difficult luge could be more technical which means smoothness on the maps. The SPX fell well below its 50-day moving average of 4,342 on Tuesday, the second time this has happened in the last seven sessions. Although last week it rebounded in the middle of a ‘buy down’ stock, it could be more difficult in the coming days given how rising yields are hurting the tech sector.
From a data perspective, the day was not helped by U.S. consumer confidence, which showed an unexpected drop to a seven-month low due to concerns about the Delta variant and inflation, according to the Conference. Board. Many technical analysts use consumer confidence as an indicator of the overall market. One month isn’t trending, but it’s definitely something to watch out for.
Overall, Tuesday’s sell-off was pretty orderly, which could be seen as a good thing. There didn’t seem to be any panic. Also, it was interesting how large the selling was in all markets. Stocks were down, but so were bonds, gold, crude and even agricultural commodities like corn and soybeans. Crude moved closer to 20 cents a barrel from its July high above $ 76, then pushed back. One of the only green spots was the US dollar, which could draw some strength from a more hawkish Fed.
It looked like an asset reset as people tried to figure out what to do before a vote on key infrastructure in Congress on Thursday and as Fed Chairman Jerome Powell warned Congress today that the inflation caused by supply bottlenecks lasted longer than expected. Today’s sale almost looked like a purge, if you will, but it will be interesting to see if “buy down” happens again.
The SPX is now not far above its 100-day moving average of 4342 (see chart above). This level may be where you see some psychological support, but that support would likely disappear with any serious movement below.
Technology tumbles like peak returns over 10 years
The Nasdaq 100 (NDX) suffered a sharp drop, down 2.8%, with some of the biggest names in tech leading the market at large. Tech giant Microsoft (MSFT) fell about 3% while Apple (AAPL) fell about 2%. As Facebook (FB) entered deeper negative territory, down 3.3%,
But chipmakers like Nvidia (NVDA) and Advanced Micro Devices (AMD) arguably suffered the worst penalties, plunging more than 4% and 5% respectively. Applied Materials (AMAT) got slammed, falling 6%. Semiconductors have been hit the hardest among all tech industries.
While the communications sector was hit the hardest in today’s session and tech finished second to last, you are probably wondering why there seems to be a ‘tech wreck’ every time the market returns. 10-year treasury increases. The most common answer is that technology stocks, like all stocks, compete with bond yields. The market is like a discount mechanism. Investors need to consider whether they will get more for their money in the next year or so by investing in bonds or tech stocks. Bond yields will tell you exactly how much you expect to earn over a period of time.
When it comes to tech stocks, their values hinge on their earning potential, which is more uncertain, especially considering the fact that technology has vastly outperformed all sectors over the past five to ten years. Additionally, you need to factor in the inflation factor, which not only erodes the value of the dollar, but adds even more uncertainty to tech earnings speculation.
Keep in mind that due to Tech’s heavy weighting in the SPX, it has a bigger impact than any other sector on the overall index. So, as TSTIME rightly pointed out this morning, the strength of low-weighted sectors like energy may help individual stocks, but won’t help the overall index much.
Some bright spots on an ugly day
And there was some strength to be found, or at least some stability, in parts of the market on Tuesday.
Some of the Dow Jones Industrial Average ($ DJI) old stocks like Ford (F) and General Electric (GE) were keen on it. Energy also held up well despite the drop in crude. And while some bank stocks like Wells Fargo (WFC) and Morgan Stanley (MS) have been shelled, others like Bank of America (BAC) and JP Morgan Chase (JPM) have remained largely unchanged. Energy and finance are sectors that tend to do better in an inflationary environment, which could explain their recent resilience.
Keep in mind what we’ve said before and what we’ll probably say again: someday is never a trend and you should never sell out of fear or because others are selling. If you have achieved certain goals that you had for your portfolio this year, there may be nothing wrong with rebalancing your portfolio. This is especially true if the stock market’s gains so far this year have derailed your holdings, with more exposure to equities than you expected.
But always have a reason before buying or selling, and take the time to think it over. It’s not a bad thing to wait a day or two and see if you still want to buy or sell before you take a step. Considering how this market evolves, it might take this whole week for things to unfold, so maybe by then investors will have a better idea of the landscape.
Do not forget either that despite this soft September, the main indices are not far from the historic highs. The SPX is only 4% below its peak. Which means that going “all the way” here to “buy the downside” might not make much sense either.
TD Ameritrade® commentary for educational purposes only. SIPC member.