Published September 4, 2020
This week’s moves in the Nasdaq 100 index (trading symbol: QQQ) offer a textbook case of the emotion that influences price movement. For days on end, the QQQ rose (blue line below), with the leading FANGMA stocks trading as if there were no price too high. Investors were fearful of missing out on the strong advance. Bets against the QQQ (the red line below) were falling as the QQQ rose in price. This is the typical behavior – e.g. investors becoming more and more comfortable with rising prices, and more complacent about a potential decline. But over the past two weeks, bets AGAINST the QQQ (in the form of rising volatility bets) began rising along with the index.
This behavior begged a question in the near-term: was bullish investor sentiment, and the money behind that sentiment, which kept driving up the QQQ, so strong it would overcome the rising level of concern? Would the QQQ be able to escape the typical September/October caution that affects stocks generally, and particularly so in election years (see our blog post from August 21st)?
The answer, at least for two days this week, was “no”. The QQQ gave back two weeks of gains in two trading sessions Thursday and Friday. There was no major surprise announcement, or sudden negative piece of information. Just as the buying had led to more buying, once the selling started, it fed on itself. The result was two sharply negative days, down almost -10% at one point. The QQQ visited its 50-day intermediate-term moving average for the first time since this rally began in April.
We can’t know yet whether this sudden drop will lead to a new round of buying as investors who missed out on the prior move now see an opportunity to get in. This step back in price is healthy for the stock market though, as it clears out some excessive optimism and rebuilds at least a part of the “wall of worry”. That “wall” provides the fuel for longer-term rallies.
Stocks saw their long winning streak come to an end this week as summer turned to fall. The week began with a -0.2% result despite a +3% advance in the market’s largest stocks, Apple (AAPL). Apple’s recent stock split has added further fuel to the torrid rally in the shares. Monday closed a powerful month of August with the S&P 500 posting a +7% gain to cap its best 5-month run since 1938. Of course stocks spent most of that time recovering from a shocking plunge earlier in the year; new highs were hit only the past couple of weeks for the broad market. Stocks bounced back to a +0.8% gain Tuesday with a positive report on manufacturing activity providing support. Strength in WalMart (WMT) and a massive +40% leap in shares of work-from-home winner Zoom (ZM) also offered encouragement. A +1.5% gain Wednesday showed the relentless nature of the market’s advance as stocks ignored a report showing employment data under-performing expectations. Investors switched gears Thursday in a broad selloff that hit high-flying tech/consumer stocks particularly hard. Perhaps it was a sour outlook from networking firm Ciena (CIEN), or the stalling action of oil prices suggesting a slowing of the economic rebound, or simply a shift to profit-taking by short-term traders after hefty summer gains. Whatever the trigger, once the selling began, it cascaded across almost every sector. The S&P 500 fell -3.5% while the Nasdaq tumbled -5%, their worst single-day showing in three months. Selling continued at the outset Friday before buyers stepped in to cut the losses by more than half. Stocks closed the day down -0.8%.
Stocks experienced a bout of volatility this week before settling in the middle of a wide trading range down -2.28% in the S&P 500 (SPY). The Nasdaq 100 (QQQ) slipped -3.08%. Small-caps (IWM) slid -2.75%. For the S&P and Nasdaq, the losses merely reversed the prior week’s gains.
Warm wishes and until next week.