With the stock market becoming quite overbought on a near-term basis, we have been saying this week that we expected the stock market to begin a pull-back after the Fed meeting/press conference, but we didn’t expect to quite as immediately as it seems to be taking place this morning. In other words, even though Chairman Powell’s cautious comments about the bounce-back in economic growth...and concerns over a second wave of the coronavirus...are getting the blame for the 2.5% drop in the S&P futures since the press conference yesterday, the market was going to pull-back soon one way or the other.
Don’t get us wrong, we’re not trying to say that these issues are not having an impact this morning. We’re just saying that some other issues would have gotten the blame if the above-mentioned issues had not developed. In fact, the fact that there ARE some new legitimate concerns...is one of the reasons the decline is coming even quicker and more severely than we had been thinking. Therefore, these new issues are good reasons to think that it is very likely that any pull-back right now will last more than just one or two days.
Of course, ever since the market bottomed in March, we’ve had quite a few mornings where the futures were looking a lot lower...and the market was able to close well above its opening levels. In the worst case scenario, it closed at/near its opening level. This is much different than we saw in February and March...when the futures would indicate a steep decline in pre-market trading AND the market would continue lower after it opened. However, this morning’s decline is a bigger one than we’ve seen the majority of the time over the past three months, so we’ll have to see if the market can avoid closing below its opening lows today. ]
On the positive side of the ledger, a meaningful short-term pull-back...after a 40% rally in less than three months...would be considered normal and healthy. On the negative side of things, Chairman Powell is not the only person admitting that the economic recovery is going to be a “long road”...as the CEO of Honeywell said this morning that he is not expecting a V-shaped recovery. When you hear comments like this...from people like this (who see daily data about the strength of the rebound)...it raises serious concerns that the stock market has gotten well ahead of itself on a fundamental basis......Fed liquidity is great, but as we’ve said many times recently, every time the Fed has added large levels of stimulus to the system over the past 12 years, it has solved the problems facing the markets AND the economy. This time around, this stimulus will not solve problems facing the economy (because the problems facing in the economy are healthcare problems, not financial ones, this time).
Therefore, the next few weeks for the stock market should be critical for the action over the rest of the summer. We’ll be watching the “old resistance” level on the S&P 500 Index...as that should provide important “new support.” The 200 DMA (which continues to trade very near the 3,000 level) we’ll be the level we’ll be watching over the next week or two. If it can hold at or above that level during this pull-back...and can rally back above the highs of early June...it’s going to be VERY bullish for the stock market on a technical basis. If, however, it breaks below this level in a meaningful way (a slight “break” will not be a problem), it will be quite bearish.
Needless to say, the action in the tech laden Nasdaq will be very important as well. Remember, the S&P made a “double top” in both 2000 and 2007. This time around, it is the Nasdaq that has the potential to make a “double-top,” so if it rolls over in a significant way, it’s going to scare a lot of investors. (Yes, it did make a very slight “higher-high” recently, but on a long-term chart, a significant decline from current levels would still create an important “double-top.” The S&P made a very slight “higher-high” back in 2007 as well.).....However, if the Nasdaq can bounce back after only a mild decline...and can break above that “double-top” high in the weeks ahead is going to be very, very bullish. Therefore, even though we’ve already had a couple of “key junctures” in the stock market this year, this one is easily as important as those others...and more important than most of them.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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