Morning Comment: Mega Tech Beginning a Correction?

We saw a decent sized reversal the mega-tech stocks got clobbered after making new highs early in the day. The decline got also go exacerbated late in the day when California announced that that it was basically shutting down once again. (No, they’re not calling it a shut-down or lock-down...and it’s not as extensive as it was earlier in the year...but with yet another very large state “rolling-back” its business openings, it’s no surprise that yesterday’s strong early morning rally turned into a significant decline by the end of the day.)

The big reversal caused the Nasdaq to drop 4% form its morning highs and a 4.2% drop in the NDX Nasdaq 100...and it gave both indices “outside-down” days. We’d also note that the volume on the QQQ NDX Nasdaq ETF jumped to 63 million shares. Only three other days have seen more volume in the QQQ’s over the past 3 months! The fact that its volume was at/near its 3-month highs...on a Monday in July (and before earnings season began)...shows that we cannot blame the big reversal on a “thin” day during the summer doldrums. It was an active day (at least in the tech sector)...and investors certainly headed for the exits when it became evident that the mega-cap names had lost some of their extraordinary upside momentum.

That said, we are NOT saying that yesterday’s reversal will definitely turn into a significant correction for the tech stocks immediately. That kind of debacle might not come until later this summer, but we strongly believe that most of the mega-cap names will see declines of at least 20% from their recent highs before we get to Labor Day (or at least those declines will begin before Labor Day). Therefore, we believe short-term traders should take some chips off the table in those names on any short-term bounces...and long-term investors should hold-off adding more money to these mega-cap names. They’ll be able to buy more shares at much lower levels before the first month of football season is over. (Oops, we’ll change that to “the first official day of autumn”...since God only knows if we’ll have any football this year.)

Before we move on past the mega-cap tech stocks this morning, we’ll just highlight that on top of the “outside down” days for the Nasdaq and NDX, it’s no surprise that FB, AMZN, NVDA and MSFT all saw outside days as well. Again, we’ll have to see more downside follow-through before we can confirm that a correction in the mega-cap tech names...and all of them are bouncing this morning. However, even if they’re able to hold-up a bit longer after yesterday’s debacle, they are still ripe for some serious declines...and we believe we’ll get those kind of corrections before long.

We did not see an outside day in the S&P, but it still closed 2.5% below its midday highs. In fact, it got RIGHT UP to its key resistance level of 3,232...and then rolled-over in a material way. This was very reminiscent of what we saw two weeks ago...when the S&P got RIGHT DOWN to its key support level...and then bounced. In both cases, many/most pundits said at “break” of those lines was definitely going to take place. However, in each case those support/resistance levels held like a rock. So this is yet another example of why it is vital to wait until an important support/resistance level is broken before investors should draw any conclusions. This is particularly true when the stock market gets stuck in a sideways range...the way the S&P 500, the DJIA and the Russell 2000 have been for over a month now.

The futures are trading higher this several bank stocks reported better-than-expected earnings. (The exception so far is WFC...which reported disappointing earnings...and cut its dividend down to just 10 cents.) The significant underperformance of the bank stocks over the past month...with the KBE bank ETF falling about 25% into it lows late last week...has set up the group for a bullish short-term reaction to any good news. Therefore, this could be something that bodes well for the broad market over the next few days.

However, there will be three things we’ll be focusing on as we go through the rest of the week. First is obviously the earnings reports...and the comments companies make in those reports & their conference calls. Second is whether the S&P 500 can break out of the top-end of its six week...after failing to do so yesterday. Finally, we’ll be watching yesterday’s lows in the mega-cap tech names. If this morning’s bounces are reversed later this week...and stocks like TSLA, AMZN, AAPL, FB & NVDA close below the Monday lows, it’s going to raise a big yellow flag on these names (and not be too good for the broad market either).

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Jul 14, 2020 — 9:07 AM
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