Several days after our article “Yes, The Crash Is Coming“, the S&P 500/SPX (SP500), Nasdaq, and stocks in general have gone through some notable corrections. Sky-high valuations, overextended technicals, and other factors finally caught up with the market. So far, it has been a mini-crash, but with potential to turn into a bigger one going forward.
Now, could this be just a 2-3 day event?
SPX pulled back swiftly to around the 3,350 before bouncing back to roughly 3,427. So far SPX has melted down by as much as 7% in just two trading sessions. Yet, SPX futures are at 3,413, indicating an improved 4.5% decline from recent ATHs.
Some key questions:
- Will stocks go lower?
- If so, how much lower?
- And when an attractive time to buy will be?
These are all good questions.
So, technically speaking: The SPX is essentially comprised of big tech stocks, financials, and pharmaceutical names. The “Big 5” tech companies now comprise around 22% of the S&P 500’s total index weight, and the top 3 sectors account for more that 50%.
Therefore, it is logical to see current sectors lead markets upwards as well as to the downside. With so much indiscriminate buying lately, as well as wildly amplified valuations and extremely overbought technical conditions, something was going to give…
… And it did: Apple (AAPL)
Apple’s blowoff top on Wednesday was a telltale sign that the market was getting ready to move down in a big way. Furthermore, the extremely fast rebound makes it likely there will be more selling to come. Therefore, AAPL is likely not done going down just yet.
While the selloff was wildly vicious (APPL gave up about 20% in just 3 days), the bounceback seemed extremely rapid, as Apple is now down by just 13% from its top. Nevertheless, the stock could fall by as much roughly 20% from current levels. This would revisit its $90-100 support area and would bring the company’s EPS valuation back into the 20s – factors the stock badly needs, in my view.
Tesla (TSLA) Madness
Tesla’s correction was quite massive, roughly 26% after its post-split top. The stock has made a decent bounce back since, but the technicals suggest there is likely more downside before Tesla gets a strong bid again. The company is still worth nearly $400 billion despite its deceptively cheap-looking post-split price tag.
Even though I remain a long-term bull and believer in Tesla, right now the valuation still seems outrageously high, and there is likely substantially more downside from here. I will consider acquiring Tesla at around $300 or lower in H2.
The VIX Signal
The VIX divergence is rarely wrong, but this quite rare phenomenon almost always leads to havoc in SPX and other markets. The fear gauge did not disappoint this time, as it shot up to 40 – an extremely high level – before closing at around 30 for the day. 40 is a good level to hit, but we could probably retest it if it does not go a bit higher in upcoming weeks.
So, what has been doing well lately?
Personally, I am not a fan of leveraged ETNs, as they degrade due to a phenomenon known as rebalancing, and also the market typically goes higher. Thus, these trading instruments typically go much lower and lose money.
However, when a sharp move lower occurs, these could turn into golden short-term trading instruments. Since introducing this “watch list” on August 31, most of these names have gone drastically higher.
Inverse ETN Performance
S&P 500 2x Inverse ETF, SDS
So, a move from about $14 to $16, settling down at around $15.50, i.e., a move of only roughly 10%. The S&P 500 and the QQQs have not bottled yet, in my view, and this phenomenon could make SDS, QID, and other inverse ETNs go quite a bit higher from here, at least in the short term.
Nasdaq 100 2x Inverse ETF, QID
QID, QQQ’s 2x inverse ETF, shot up by around 25% from its $8 low at one point. That is quite extreme, but it appears as if the bounceback may have been too quick. Furthermore, there are a lot of uncertainties concerning the economy, the political, and the global coronavirus crises, and other bearish scenarios to consider. Therefore, QID may continue to trend higher while the Nasdaq 100 and tech stocks in general cool off at a bit lower levels.
Taking Some Money off the Table
After such stellar gains, it is never a bad idea to take some money off the table. I suspect dry powder may be extremely useful in the near future. Thus, reducing positions and/or implementing hedging is extremely useful leading up to and into market top areas
Reducing Positions & Building up Dry Powder
We discussed reducing tech shares notably to only about 3.5% of portfolio holdings on August 28th (please refer to real-time portfolio in the tools section). We also sold off most of our banks in anticipation of a market move lower.
There is Some Good New, Right?
Bitcoin: Looking More Attractive Now that it’s Much Cheaper…
BTC has given up all of its gains from the recent, vicious, head and shoulders unwind. The good thing is that fundamentally nothing has really changed, and fundamental factors appear to remain in Bitcoin’s favor long term. Furthermore, it’s at times like these, after 20+% corrections, that fear shakes most of the weak hands out of the market.
Corrections even in bull cycles are necessary. It is also good to remind ourselves just how volatile and unpredictable the Bitcoin/blockchain enterprise market can be at times. In a few words, “A bit humbling, an interesting learning experience, but Bitcoin is still likely going much higher from recent levels”.
This will very likely be an extremely crucial week for markets in general. The SPX and stocks can either recover or they may have quite a bit of downside from here. I suspect that the SPX will go down by at least another 5% or so due to much worsening technical momentum and mounting uncertainties on the fundamental front. So, a buying opportunity is coming. I’m watching for SPX 3,200, which is a major technical support level and marks roughly a 10% correction from the S&P 500’s ATH top.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Please always conduct your own research before making any investment decisions.
Originally published on Seeking Alpha