If history is any guide the market tends to rally at the end of the quarter…as institutional investors mark-up their favorite picks. Thus, with only two days left in the first quarter, maybe it should be no surprise that the market is holding up pretty well in the face of the Archegos debacle.
(Don’t listen to those people who keep saying that the stock market “should” see a sell-off at the end of a quarter. They say this will happen because of higher interest rates…and thus some institutional investors will have to reweight their holdings by selling stocks & buying bonds at the end of the quarter. It sounds good theoretically, but since long-term rates bottomed & started rising a year ago, the market has only sold-off once over the last five days of trading. In fact, the average return of the past 4 quarter-end examples has been a GAIN of 2.5% for the S&P 500 index.)
Of course, there are plenty of reasons why the market could still fall by tomorrow’s close. On top of the Archegos situation, we have rising Covid cases around the world…and a rise in long-term interest rates to their highest levels for this move. However, “quarter-end” factors tend to be bullish, not bearish.
Anyway, most of the stock market held up very well yesterday in the face of all news surrounding the reported losses at Archegos, Credit Suisse, Nomura, etc. We worry that this type of action in the face of a bearish development is a sign of a very high level of complacency in the markets…but we have to admit that could actually mean that the markets and economy are strong enough to hold-up under these conditions.
As you might gather from our recent comments, we think it’s the former rather than the latter. There is just too much going on right now to say that the stock market is healthy. We’ve seen a big jump in interest rates over the past year…and a measurable divergence between the S&P 500 and the Nasdaq. We have wild swings in stocks that have high levels of short interest...and wild swings in stocks that are being bought with too much leverage. We also have wild swings in the prices of many SPACs…and other assets like Bitcoin……..…None of this means that the stock market is going to roll-over in a significant way immediately, but it DOES tell us that the rally is not as “healthy” as it was back in the fourth quarter of last year.
We have spent a lot of time talking about the tech laden Nasdaq Index…as well as the SMH semiconductor ETF…and some individual tech stocks recently. We’ve highlighted how their recent underperformance is concerning…and how any break below their March lows will create a big problem for them…and likely for the rest of the stock market as well.
There is another index we now have to worry about…the Russell 2000 small-cap index. Even though the Nasdaq…and especially the DJIA and the S&P 500 indexes…all bounced off their intraday lows yesterday, the Russell 2000 closed on its lows of the day. This key small-cap index fell 2.83%. Like the Nasdaq, the Russell is not too far from its March lows. It has already broken below its trend-line from November (when it began to rally strongly right after the election)…and it is now only about 1% away from those March lows. We’d also note that it can be seen as getting very close to testing the “neck-line” of an “head & shoulders” pattern. (The right shoulder quite small, but it still retraced 1/3 of the recent decline.) Either way, since it has already broken below its five-month trend-line, any meaningful break below its March lows of 2134.25 is going to raise a big warning flag on this index for the Russell 2000. (First chart below.)
There is yet another area of concern that is grabbing our attention as well. The biotech stocks have rolled over again. They actually topped-out back in February…as the IBB biotech ETF fell almost 15% into early March. It then bounced off a short-term oversold condition. However, after it worked-off that condition, it has rolled-back over in recent weeks and is now testing its own March lows. This ETF is already WELL below its trend-line from Election Day, so it if makes a “lower-low”…it’s going to raise a big red flag on this part of the stock market as well! (Like the Russell, the March low of 147.23 could also be seen as a “neck-line” of an “H&S” pattern for the IBB….but that might be a bit of a stretch.) Either way, those March lows are a key support level and so we’ll be watching this ETF very closely going forward as well. (Second chart below.)
The individual stock that concerns us the most in the IBB is Moderna (MRNA). That might sound odd given that their vaccine has shown to be 90% effective in a recent federal study, but there’s no question that the stock has been under a lot of weakness recently…….There was chatter out of the White House yesterday that the Biden Administration is considering removing the intellectual property shield for vaccines…so this caused the MRNA to drop over 7% yesterday. However, the stock had already rolled over at a “lower-high” two weeks ago, so this “chatter” cannot take all of the blame for this weakness.
MRNA now stands 33% below its February highs…and it has ALREADY broken below the “neck-line” of an “head & shoulders” pattern. (Lots of “H&S” patterns out there right now.) It’s “neck-line” is an upward sloping one, so it might still have to break below its March lows of $123.44 before it confirms a break-down on a technical basis. However, since it closed RIGHT ON that level last night, it’s yet another item we should all keep an close eye on over the rest of this week.
It’s weird…several big names in the IBB (like AMGN & GILD) are not breaking down anywhere near as badly as MRNA has recently. However, there’s no question that this stock (and several others in the sector, like Illumina) are not acting well on the charts. Therefore, we have no choice but to raise a yellow flag on the biotech area right now…and it will not take a lot more downside follow-through to change that flag to a red one.
(If you'd like to get these unique insights during these fascinating times in the investment world, please click here to subscribe to “The Maley Report.”)
Matthew J. Maley
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.