Finally the crazy NASDAQ momentum stocks took a break without any apparent catalysts last Thursday. Apple lost almost 20% in two days measured from high to low, but it was able to close off Friday’s low. The usual buying the dip crowd showed up again last Friday around 11 am when NASDAQ almost hit its 50-day moving average. Is the correction over?
In order to answer the question, we need to know what kind of top we just had. This September top was originally inspired by the easy money policy, but the August speculative fever pushed it over the top. We just found that Softbank bought billions in individual stock options, betting on high prices for the biggest names in tech over the past month, driving up volumes and contributing to a trading frenzy. A lot of the call buying was an upward lift to the market. The sellers of those calls, then had to buy stocks and hedge and it becomes a self-fulfilling prophecy on the upside. Strength begets strength until it doesn’t.
On September 2nd, the NASDAQ traded 60.22% over its 200-week moving average. Prior to the pandemic, the NASDAQ traded 42.27% over its 200-week moving average in February 2020. The highest-ever percentage over its 200-week moving average was 157.88% during the 2000 dotcom bubble. Now you can see, this September 2020 top is a mini bubble, not quite as bad as the dotcom bubble. Interestingly, the value stocks such as banks XLF, industrials XLI and materials XLB were not doing so bad during the NASDAQ selloff. Airline ETF JETS was not affected by the NASDAQ selloff at all. So far, it appears that the correction is focused on the big tech names, cloud stocks, software stocks and stay-home stocks.
Of course, as long as the NASDAQ is in correction, the rest of the stock market will not and cannot rally independently.
When we look at the NASDAQ on a yearly basis, 2020 is the 11th year up from 2009, but it is 18th year up from the dotcom crash 2002 low. It is also 26 years from the breakout which began in 1994. The NASDAQ made a higher low in 2009 than in 2002 while the Dow and S&P 500 both made a new low in 2009. So from the timing perspective, the NASDAQ is a very mature market.
The fate of mega tech companies resides in the hands of the government. The mega tech companies can grow unimpeded because they are so powerful, but it is not healthy for the society to have only a handful powerful winners while the rest of the small businesses can’t participate in the competition. The mega tech companies have been actively involving in the election politics by regulating Trump’s tweets and Facebook postings. If Trump wins the election, there is no doubt that Trump will take on the mega techs and perhaps use anti-trust laws to break them apart.
On the other hand, the investing community is completely sold on the idea that the Fed will backstop any stock market crash and bull market will continue for a long time after this speculative mini bubble has been settled.
We believe that the outcome of the presidential election will determine the fate of this bull market simply the NASDAQ has been so stretched in price and time.
Right now the NASDAQ is 23.04% over its 200-day moving average, it was 17.82% over its 200-day moving average in February 2020, which is the previous 4-year cycle high location. It took 4 years (from February 2016 to February 2020) for the NASDAQ to achieve the four-cycle high, it only took five months for the NASDAQ to achieve a stronger position than the previous 4-year cycle high. We are highly doubtful of the longevity of the bull market in the price and time perspective.
So the answer to our question is NO, the current correction is NOT over. The market will make sure those momentum traders to pay a price for manipulating a blow off top. Those momentum traders got caught and they will have to unwind the bullish bet. Selling will beget selling.
We are watching the S&P 500 200-day moving average at 3092, which is about 12% below the current price. In order for the bull market to continue, the 200-day moving average has to hold.
Technically, the NASDAQ is 6 weeks into the weekly cycle that started on 7/24/2020. The weekly low of 10875.87 has to be taken out in order for the selloff to continue.