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Thursday, September 03, 2020 Headlines

1. Investors hit the sell button as tech stocks lead slide
2. Unusual Nasdaq volatility preceded fall
3. When will investors start to panic?

Market Moves

Stocks sold off strongly through much of the session, led by heavy selling in large-cap tech stocks. The volatility on the Nasdaq 100 (NDX) gives cause for concern. If stocks do not maintain their upward trend, a longer-term correction could follow.

While the S&P 500 index (SPX) closed 3.51% lower, the Nasdaq ripped nearly 6% from yesterday's close at the lowest point in the session. The news that touched things off was that unemployment claims hadn't fallen as much as expected—even though they had actually fallen. Though this move was more volatile than any trading session since midway in June, the moves seem to suggest aggressive profit taking rather than panic selling.

The chart below highlights how most of the big-tech issues have dropped back into the average range of their prices. The linear regression study shown on each of the four panels, Microsoft (MSFT), Apple (AAPL), Tesla (TSLA) and Alphabet (GOOGL) displays the statistical upward trend since late April, when volatility began to decrease. This seems to be a reasonable measure of the current trend, and these stocks are staying nicely within the ranges.

The one exception among these stocks is MSFT. Comparatively it looks the weakest. If the rest of the market were to have trouble, it would probably show up in the price pattern of MSFT first. Chart watchers would do well to keep an eye on whether these shares rebound in the lower range of the regression channel or not.

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Unusual Nasdaq Volatility Preceded Fall

Investors took post-split profits on Apple (AAPL) and Tesla (TSLA) yesterday, and that may have spurred some of the selling today. However, a greater possibility exists that investors are concerned with stock valuations and uncertainty surrounding the presidential election. The evidence for this is shown in the chart below which compares the NDX and the CBOE Nasdaq Volatility Index (VXN).

The top two panels mark how the previous 10 days were unusually positively correlated between these two indexes. This is rare. The last time anything like this occurred was at the beginning of the year 2006, which featured five months of a sideways move on NDX followed by an 18% decline in June. It is an important warning signal for investors to know about right now.

Alphabet (GOOGL) at 5-Year Resistance After Big Breakout

Twitter (TWTR) at Cusp of Major Breakout

When Will Investors Start to Panic?

Most investors will wonder what their guideline should be for when to act. The best rule of thumb for people who don't want a buy-and-hold strategy is to only move money around if it seems likely that the index will lose more than 10% of value. Especially if that loss will take more than a month of time to play out. Such circumstances will allow investors to get out and likely get back in at a lower price.

The chart below maps out a reasonable forecast for how the markets should likely go over the next few weeks using a quick-and-dirty approximation of Elliott Wave Theory (EWT). These EWT projections (gray lines) should not break the lower trend line established by State Street's S&P 500 index ETF (SPY). If SPY closes below that trendline, it will diverge away from the EWT projections. This would be a reasonable point for active investors to consider taking action.

The Bottom Line

Big tech stocks sold off strongly on news that shouldn't have made investors panic: unemployment isn't down enough. The Nasdaq index and the Nasdaq Volatility index showed a rare correlation which often precedes larger corrections in the market. Investors might want to keep an eye on the S&P 500 trendline for now.