The current sell-off may end up emboldening the bulls, if the last tech bubble is a guide


The bubble isn’t burst yet.


Justin Edmonds/Getty Images

Traders at the moment seem to have as much patience with tech stocks as Kansas City Chiefs fans do for a moment of unity.

Thursday was the fourth ugly finish in five sessions, with the Nasdaq Composite
COMP,
-1.99%

skidding 2%, and the other major indexes backtracking as well.

Andrea Cicione, head of strategy at independent investment research firm TS Lombard, said excessive leverage in the market really began in earnest in July. Cicione added that was occurring in U.S. stocks wasn’t happening anywhere else in the world.

And while he’s seeing signs of a bubble, he thinks if the selling doesn’t intensify, the bubble may reflate soon.

“The leverage accumulation so far may not be enough to burst the bubble just yet,” he writes. “If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk.”

Between 1997 and 1998, the Nasdaq experienced three sell-offs of at least 17%, only to emerge stronger and rise four-fold to the 2000 peak. “Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet,” he says.

The reason leverage is important in bursting bubbles is because it uniquely can lead to forced unwinding. “When faced with margin calls they cannot meet, investors may have to liquidate positions against their will. The resulting fall in prices can instil doubts in the mind of others, persuading them to sell,” he said.

The buzz

Consumer price data for August is due at 8:30 a.m. Eastern.

The quarterly services survey and August budget deficit are also due for release. The Congressional Budget Office, which typically gets the budget picture pretty close to the mark, estimated the August deficit was $198 billion, and said the September-ending fiscal year gap will be the highest relative to the economy since 1945.

Database software giant Oracle
ORCL,
+0.66%

topped earnings and revenue expectations, helped by revenue from key client Zoom Video Communications
ZM,
-1.32%
.
Oracle also declined to discuss whether it will buy the U.S. operations of social-media company TikTok, as U.S. President Donald Trump said Thursday there will be no extension of the Sept. 15 deadline for it to be sold to a U.S. company or shut.

Peloton Interactive
PTON,
-3.75%
,
the exercise bicycle company, reported stronger-than-forecast fiscal fourth-quarter earnings and revenue, with its current year outlook also well ahead of estimates.

Jean-Sébastien Jacques, the chief executive of mining giant Rio Tinto
RIO,
-1.67%
,
announced he will resign in March following the controversy over the firm blowing up ancient caves while excavating for iron ore.

Thursday marked the first day since spring when new coronavirus cases in the European Union and the U.K. exceeded the United States.

The market

U.S. stock futures
ES00,
+0.65%

NQ00,
+0.64%

were stronger.

Gold futures
GCZ20,
-0.46%

fell while oil futures
CL.1,
+0.21%

edged higher.

The British pound
GBPUSD,
+0.18%

continues to reel from its more combative stance taken against the European Union in trade negotiations.

The chart

This incredible UBS illustration of Tesla
TSLA,
+1.38%

shows how shares have performed compared to other tech giants since joining the $100 billion market cap club. It took Apple
AAPL,
-3.26%
,
Alphabet
GOOGL,
-1.36%

and Facebook
FB,
-2.05%

between 4 to 11 years to achieve what Tesla did in three quarters. UBS increased its Tesla price target to $325 from $160 ahead of the company’s battery day presentation.

Random reads

Here’s the 2010 memo from a venture capital firm on an investment which valued retail software maker Shopify at $25 million. Shopify
SHOP,
-1.59%

is now worth $114 billion.

China said its U.K. ambassador’s Twitter account was hacked — after a steamy post was liked.

An experimental treatment kept mice strong in space, one that could have uses back on Earth.

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Wall Street sees a bright side in ‘healthy’ tech selloff By Reuters


© Reuters. FILE PHOTO: A street sign is seen in front of the New York Stock Exchange on Wall Street in New York

By Lewis Krauskopf

NEW YORK (Reuters) – Some of Wall Street’s biggest players are viewing the stock market’s recent tech-led selloff as a bout of turbulence rather than the start of a longer slide — and they don’t see it as a reason to run for the door.

Invesco this week called the Nasdaq’s sharp decline a “healthy period of consolidation” while fund manager Lord Abbett said U.S. stock valuations are likely merited, based on an analysis of companies’ earnings.

On Sept. 4, Goldman Sachs (NYSE:) reiterated its year-end price target of 3,600 on the S&P 500, roughly 6% above the index’s close on Wednesday, while UBS Global Wealth Management recommended clients “ease into the markets” rather than stay on the sidelines.

Their optimism highlights how the Federal Reserve’s pledge to keep interest rates at record lows and hopes of a breakthrough in a vaccine for COVID-19 have underpinned market gains this year, though many remain wary that the U.S. presidential election and massive options bets on tech-related stocks could exacerbate market swings in the remaining months of 2020.

“What we think we are going through is a healthy correction, removing the froth,” said Troy Gayeski, co-chief investment officer of SkyBridge, an alternative investments firm. “We certainly could fall more. But if you’re a tech investor you had to understand that the valuations were very high.”

The Nasdaq posted its best day since April on Wednesday, a day after falling into correction territory, commonly defined as a fall of 10% or more from a recent peak. The other major indexes also rebounded on Wednesday after steep declines.

“I think of this rout not so much as a correction, but as a digestion,” Kristina Hooper, Invesco’s chief global market strategist, said in a recent note.

Second-quarter reported earnings on the S&P 500 were 23.1% above expectations, far above the trailing five-year average of 4.7%, analysts at Lord Abbett said in a recent note.

“Earnings momentum, and the magnitude of analyst earnings revisions, is outpacing that in other markets, suggesting that higher valuations on U.S. equities are merited,” the report said.

Still, some believe more volatility is in store. A recent poll of investors from UBS Global Wealth Management showed 65% viewed politics as their top concern, with the Nov. 3 U.S. presidential election just weeks away.

Prominent investor Stanley Druckenmiller – a skeptic of this year’s rally – again sounded a bearish note on Wednesday, warning on CNBC https://www.cnbc.com/2020/09/09/stanley-druckenmiller-says-were-in-a-raging-mania-and-the-next-3-to-5-years-will-be-challenging.html that the stock market is in a mania fueled by the Federal Reserve.

Uncertainty over huge options purchases by SoftBank Group Corp (T:) also hung over markets, creating another risk.

Gayeski, of Skybridge, said he could see an opportunity to increase equity risk if there was a sharper drop, such as the Nasdaq falling 20% or the S&P 500 declining 15% from their respective highs and there were other supportive signs for the market such as the Fed’s expanding its balance sheet further.

Any selling that spreads beyond the big tech-related stocks that have led markets higher could be an indication that the pullback may be extending further, said Willie Delwiche, an investment strategist at Baird.

In the coming days, Delwiche is looking for signs of increasing investor caution — such as buying of put options, outflows from equity funds and diminishing bullish views in surveys — that indicate any over-exuberance has waned.

Another indicator is how investors respond to key technical support levels, said Keith Lerner, chief market strategist for Truist/SunTrust Advisory. The Nasdaq, for example, on Tuesday closed below its 50-day moving average for the first time since April, but was back above it on Wednesday.

“If you see these markets just slice through support levels, that’s a sign that the sellers have the upper hand,” Lerner said.





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U.S. tech selloff hits equities, oil falls on demand worry By Reuters


© Reuters. People wearing protective masks, following the coronavirus disease (COVID-19) outbreak, are reflected on a screen showing stock prices outside a brokerage in Tokyo

By Stanley White and Jessica DiNapoli

TOKYO/NEW YORK (Reuters) – Asian shares fell on Wednesday and oil prices hit lows not seen since June after a rout in technology shares sank Wall Street for a third consecutive day and a major drugmaker delayed testing of a coronavirus vaccine.

MSCI’s broadest index of Asia-Pacific shares outside Japan () slid 1.06%. Australian stocks () dropped 2.47%, while shares in China () fell 1.53%. Japan’s Nikkei () skidded 1.12%.

U.S. S&P 500 E-mini stock futures () erased losses and rose 0.25%, white Nasdaq futures () also rose 0.83%.

Euro Stoxx 50 futures () were down 0.03%, German DAX futures () fell 0.14%, and futures () fell 0.29%.

Sentiment for equities and other risky assets also took a hit after AstraZeneca Plc (L:) paused a late-stage trial of one of the leading COVID-19 vaccine candidates due to an unexplained illness in a study participant.

Treasury yields extended declines as investors sought the safety of holding government debt. Risk aversion also pushed the yen to a one-week high against the dollar.

A sell-off in high-flying U.S. technology shares, fueled partly by concerns about excess purchases of call options, has increased the risk of a larger correction across other markets.

“The performance of Wall Street is going to leave a heavy residue, and most noteworthy is how the tech names dropped down quite aggressively. Investors will take a close note of that,” said Tom Piotrowski, a markets analyst at Australian broker CommSec.

“The dramatic fall in oil prices in the last day is being seen as a proxy for global growth expectations. That 7.6% fall will certainly be resonating.”

The Dow Jones Industrial Average () fell 2.25%, the S&P 500 () lost 2.78%, and the Nasdaq Composite () dropped 4.11% on Wall Street on Wednesday.

Among U.S. technology names, electric-car maker Tesla (O:) plunged 21.06% on Tuesday, its biggest daily percentage drop, after it was excluded from a group of companies being added to the S&P 500.

SoftBank Group Corp (T:) shares fell 3.64% on Wednesday due to worries about the Japanese conglomerate’s trading in call options on U.S. tech stocks.

SoftBank has fallen around 12% since sources told Reuters and other media late last week that it built up stakes in major U.S. tech companies worth around $4 billion and bought a similar amount of call options for the underlying shares.

Counterparties who sold the call options to SoftBank would have to hedge their exposure by buying the underlying shares, which likely contributed to the Nasdaq () and S&P 500 () reaching record highs only days ago, some traders say.

Options are pricing in bigger market swings from Sept. 16 to Oct. 16, according to one investor.

The U.S. Federal Reserve’s next meeting ends on Sept. 16, which could have a big impact on stock markets because many analysts say excess liquidity created by the Fed has contributed to rising equity prices this year.

U.S. 10-year Treasury yields () fell to 0.6690%, while the yield curve between two-year and 10-year notes flattened slightly, highlighting declining appetite for risk.

The British pound fell to six-week lows against both the dollar and the euro.

Escalating concerns over Britain leaving the European Union without a trade agreement are weighing on sterling.

The () against a basket of six major currencies stood near a four-week high as Wall Street’s sell-off and renewed fears about Brexit boosted safe-harbour demand for the greenback.

Oil futures extended their sharp decline to the lowest levels since June due to concern about weak global energy demand and excess supply.

Brent () fell 0.63% to $39.53 a barrel, while U.S. crude () lost 0.73% to trade at $36.49.





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Wall Street sinks on tech selloff, recovery worries By Reuters


© Reuters. The front facade of the of the NYSE is seen in New York

By Medha Singh and Devik Jain

(Reuters) – Wall Street’s main indexes tumbled on Thursday, heading for their worst day since June as investors dumped high-flying technology-focused stocks, while economic data highlighted concerns about a long and difficult recovery.

Shares of Facebook (O:), Apple (O:), Amazon.com (O:), Netflix (O:) and Alphabet (O:) sank between 4.6% and 6.2%. The NYSE FANG+TM Index (), which includes the five core FAANG stocks, shed 6.2%, putting it on track for its biggest one-day decline since March 16.

Unprecedented fiscal and monetary support as well as increasing bets on stay-at-home tech stocks have powered a rally in U.S. stocks in recent weeks, sending the S&P 500 and Nasdaq to record closing highs on Wednesday.

“Some of the stocks have gotten a little pricey, and what the actual cause is to spark this selloff is difficult to say,” said Randy Frederick, vice-president of trading and derivatives for Charles Schwab (NYSE:) in Austin.

“The leading sector for quite a long time has been the Nasdaq, which is very heavily weighted in technology stocks so people just saw this as an opportunity to take the profits off the table.”

Earlier in the day, data showed the number of Americans filing new claims for unemployment benefits fell more than expected last week, but remained extraordinarily high. The government’s closely watched monthly payrolls report is set for Friday.

“We’re going to struggle to put people back to work, it’s going to be another three to four years and then we have to sustain it,” said Greg Hahn, chief investment officer at Winthrop Capital Management in Indiana.

Separately, a survey showed U.S. services industry growth slowed in August, likely as the boost from the reopening of businesses and fiscal stimulus faded.

Wall Street’s fear gauge () crossed its 200-day moving average, to hit its highest level in seven weeks.

The technology sector () declined 5%, while communication services () and consumer discretionary () lost more than 3% each. At 11:34 a.m. ET, the Dow Jones Industrial Average () was down 633.96 points, or 2.18%, at 28,466.54, the S&P 500 () was down 105.09 points, or 2.93%, at 3,475.75. The Nasdaq Composite () was down 530.39 points, or 4.40%, at 11,526.06.

Tesla Inc (O:) tumbled 7.4%, falling for the third straight session.

PVH Corp (N:) rose 3.6% after the Calvin Klein owner posted a surprise quarterly profit, boosted by strong online demand for comfortable and casual clothing during the coronavirus-led shift to work from home.

Declining issues outnumbered advancers for a 3.87-to-1 ratio on the NYSE and for a 4.12-to-1 ratio on the Nasdaq.

The S&P index recorded 18 new 52-week highs and no new low, while the Nasdaq recorded 23 new highs and 38 new lows.





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Micron’s Shares Are Facing A Steep Sell-Off (NASDAQ:MU)


Micron (NASDAQ:MU) shares have gone nowhere since the company reported results at the end of June. But the stock may be heading lower in the weeks ahead. The company had better than expected fiscal third quarter results and even provided a better outlook. Still, investors seemed unreceptive to the news, despite the broader technology sector rising.

The poor reception could be why some traders are betting that Micron’s stock moves lower by the middle of September. Even the technical chart suggests the stock moves lower by as much as 10%. You can track all of my free SA articles on this Google Spreadsheet I have created.

Lack Of Response

The company reported earnings that came in almost 6% higher than analysts’ estimates and revenue that was nearly 13.5% better than estimates. Additionally, the company provided guidance that has resulted in analysts boosting their revenue and earnings estimates for the next quarter. Still, investors seemed unimpressed.

(Refinitiv)

Perhaps, investors are waiting to see profit margins improve. In the fiscal third quarter, the company had non-GAAP profit margins of 33.2%, which was only a mild improvement from the second quarter’s 29.1%. Currently, analysts estimate that fiscal fourth quarter margins will improve to just 35.5%.

The stock historically has been a gross profit margin story, with shares rising and falling as margins have expanded and contracted. In this current cycle, the price of the stock never really fell to account for the weak margins. It could be that gross margin improvement going forward has already been priced into the current share price. Or perhaps, the stock still needs to correct.

(Refinitiv)

Stock May Fall

It could be why traders are betting that the stock falls heading into the companies next earnings report, which is expected towards the end of September. On July 28, the open interest levels for the September 18 $55 calls rose by about 8,500 contracts, and the $55 puts rose by roughly 8,200 contracts. The puts were bought for around $5.30 per contract, while the calls were sold for about $1.90 per contract. It is a bearish put spread, and it means that a trader spent about $3.40 to put the trade together. It means that Micron’s stock needs to stay below $51.60 by the expiration date for the trade to earn a profit. Currently, the stock is trading for around $50.60 on July 28.

Weak Trends

The chart shows how the stock has been range-bound since June – but generally been trending higher since the end of March – making a series of lower highs. For now, there is firm support at the uptrend around the price of $49.80. Additionally, that price had served as extreme resistance from April through June. If the stock breaks that support level at $49.80, it is likely to result in the shares dropping to around $45.50, a decline of about 9%.

Additionally, in yet another bearish indication, the RSI has been slightly trending lower. It means that Micron has slowly been losing bullish momentum over the last few months.

Risks

The risks with Micron are never simple, as this stock can be one of the great momentum stocks once the buyers get behind it. For now, it seems that the buyers are sidelined. However, that could easily change should the Fed deliver bullish commentary on Wednesday, or technology earnings come in better than expected on Thursday, easily helping the equity take-off along with the rest of the market. Should the stock rise above resistance around $54, it could run back to its highs around $61.40.

It seems that, for now, the setup in the chart and options market suggests that the buyers do not return for some time to come.

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