Schooled. The first bell of the school year rang yesterday for many across the US marking an end to the summer holiday. Similarly momentum along with emerging market stocks were woken up by alarms yesterday as they hit a soft patch. Yesterday’s session began with many traders awaiting tech giants Facebook and Twitter testifying on capital. Many expected that the tech giants would be publicly lambasted and even expected some tech stocks to have a rough day. The grilling turned out to be less harsh than expected but the selloff that ensued seemed to take some by surprise as the tech sector traded off more than 1%. Recall the theme I have been presenting in comparing index performance to get a handle on investor sentiment and you will see a clear picture emerge from yesterday’s session. As one might expect, the tech heavy NASDAQ 100 spent the entire session in the red closing down -1.2%. The index bounced off of its round number support line at 7500, which is the only support it will receive above the 7298 Fibonacci line (see chart 8 in my attached daily chartbook). In contrast, the broader S&P 500 which also contains some tech heavyweights traded off only -0.3% indicating that the NASDAQ selloff was not due to technology alone. The NASDAQ 100, though it is sometimes used as a technology bellwether is home to many large growth stocks as well and if we were to dig a bit deeper we would see that yesterday’s selling was broader and included momentum stocks in general. We can look at chart 16 in my attached daily chartbook (Growth Relative to Defensive) to see the downward spike indicating that the recent uptick in speculative growth buying took a pause yesterday. The small cap RUSSELL 2000 index, which is also more speculative and growth-oriented also traded off in yesterday’s session, and is another indicator of investor sentiment. Though late session buying helped the index to close well off its lows, the distinction between growth and value appeared quite clearly yesterday. The whipped cream on top of my thesis is the Dow Jones Industrial Average, being the least speculative of the indices, which managed to close in the green yesterday. The S&P 500, the Dow Jones Industrials, the Russell 2000, and NASDAQ 100 all remain constructive. The bond market ended the session virtually unchanged with 10 year yields hovering around 2.9%, which is a further indicator that yesterday’s selloff in momentum stocks was not a broad-based panic but rather a continuation of a rotation into value stocks. Recall that investors who are less confident about the future will choose value stocks over more-speculative growth stocks. Bitcoin, along with most of the cryptocurrency market traded off yesterday in response to a report that Goldman Sachs is slowing down its launching of a crypto desk. Although it is difficult to see on the chart because of the wide range of its trailing 12 month range, the currency bounced off of its 6759 Fibonacci support line and will get support at around 6100 if that line isn’t held - Bitcoin is trading at 6349 as I write this note (see chart 15 in my attached daily chartbook).
So all in all it was a volatile day for speculative investments and the pattern is clearly notable when comparing the relative daily performance of the major indices. In today’s session, we will get the ADP employment change number which is expected to show a healthy increase of 200k new jobs and is perhaps an early indicator of tomorrow’s “official” employment number. We will also get Factory Orders, which are expected to show a decline of -0.6% after growing 0.7% last month (don’t forget the big production number from earlier this week). The US Census Bureau will release durable goods orders this morning and it is expected to show a decrease of -1.7% for a second month in a row. These are just a few of the releases expected today and they will surely serve as factors in today’s trade, especially in fixed income. Summer fun may be over but the real excitement is just beginning on Wall Street… and Capitol Hill.