Today could be one of those days where all investors wait around to see what happens next. Sometimes, there is a very important data point that everybody wants to see; or there is a speech that everybody wants to hear. In those cases, investors sit on their hands for a day and wait to see what happens in those events. This could certainly be the case today, as everybody will be waiting to see the results of the Red Sox/Yankees playoff game tonight. As we highlighted yesterday, the last time there was a one-game playoff between these two teams at Fenway Park (in 1978), the Yankees won…and the stock market immediately rolled-over and fell another 12% (after already falling a bit in September)!
However, one thing we did not mention yesterday morning is that great bull market for stocks that began in 1982 was pushed-out almost four years by that Yankee victory! That’s right, the great bull market that began in 1982 started from a level on the S&P 500 index that was almost exactly the same as the one we saw just before that infamous playoff game in 1978.
THEREFORE, if you root for the Yankees tonight, you will actually be rooting for a deep correction in the stock market over the next month…AND you’ll be rooting for the stock market to do NOTHING over the next four years! THAT is un-American!.......What we’re trying to do here is to take a page from Otter in the movie “Animal House” and say, “You can do what you want to us (Red Sox fans), but I will not stand by and listen to you (Yankee fans) bad mouth the United States of America!”
Seriously though, the elevated level of volatility continued yesterday as the S&P 500 fell 1.3% and the Nasdaq Composite (& the NDX 100) gave back over 2%. The decline took place on higher volume (which is unusual for a Monday), but it came on breadth that was not too bad at all. The breadth (advancers vs. decliners) was 2.3 to 1 negative for the S&P 500 Index. This is not bad for a day when the index fell more than 1%. It was less than 3 to 1 negative for the Nasdaq Composite. However, it was more than 8 to 1 negative on big-cap/big-tech laden NDX Nasdaq 100 Index. So you can see that the weakness was more concentrated than it was on several days last week.
Having said this, the decline in the tech sector was the main development that created the last full-blown correction we’ve seen in the stock market (in September of last year). Therefore, the fact that the XLK technology ETF fell 2.3% yesterday and now stands 7.3% below its late August highs, is something that should still worry investors. We’d also note that the SMH semiconductor ETF dropped 2.6% yesterday, and that one is now 9.4% below its recent record highs from mid-September.
Therefore, the fact that the decline was concentrated in the tech sector yesterday is not a reason to get excited about the thought that a bottom for the broad stock market could be just around the corner. If the XLK breaks more meaningfully below its 100-DMA, it’s going to be very negative for the tech sector. That, in turn, should be quite negative for the broad market…just like it was last year. (First chart below.)
As for the above-mentioned broad market, the S&P 500 Index closed RIGHT ON the 4,300 support level we highlighted again yesterday morning. (To review, a meaningful break below that level would give it an important “lower-low” (below is lows of the past two weeks), and take it below its 100-DMA. It would also mean that it has broken below the “neck-line” of a “H&S” pattern.) The Nasdaq did close below those levels yesterday…and it also broke below its trend-line from the end of September 2020 (when the last correction bottomed). So, that raises the odds that the S&P will do the same thing before long. (Second chart below.)
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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