Nasdaq 100 Touched Correction Territory As Week Began, Hurt By Apple Dip

As the first anniversary of Covid approaches, stocks that helped keep the lights on during the darkest days of 2020 are forging a big retreat. 

The Tech selling stalled overnight as investors got back to “buying the dip,” but we’ll see what happens as Tuesday continues. Sometimes pre-market trading trends carry over when the opening bell rings, sometimes they don’t. Whatever happens, it’s way too early to say for sure if this downward surge is stalling. 

One major catalyst for strength early today is a big drop in the 10-year Treasury yield to 1.52%. It was above 1.6% yesterday. These kinds of sharp moves aren’t typical, and traders may want to stay on their toes and use extra care. Where things are now, volatile yields could mean volatile stocks. 

Overall, it’s not just the U.S., but most places around the world rallied overnight. The dollar had been near a three-month high, but with yields pulling back, the dollar is pulling back, which could be helping overseas markets. 

Rally Hats On, But For How Long?

The main question for today is whether we can hold the rally, and the first hour of trading could help tell the tale. The last hour of the day also will be important to watch. Lately, including yesterday, things have gotten slapped down toward the close. Consider today a test case. If there’s one thing we’ve learned lately, a lot of intraday volatility can send things up or down very quickly.

See also: Best NASDAQ Penny Stocks

So far today, the Cboe Volatility Index (VIX) is just below 25, and it wouldn’t be surprising to see it bounce around in between 23-30 for a while.

It’s official: The Nasdaq 100 (NDX), which includes some of the biggest Tech and Communications Services companies, fell into correction territory yesterday. At its lows Monday, the NDX was down nearly 11% from an all-time high recorded only about a month ago. Investors continue to rotate out of the big names that helped steer last year’s recovery from the pandemic selloff. A correction is usually defined as a 10% drop from highs.

Before talking more about that, we bring you Tuesday, a day with no major economic data and a nearly empty earnings calendar. Dicks Sporting Goods Inc DKS did report a solid quarter this morning, but shares sank in pre-market trading as the company warned that sales could slow.

Things pick up later this week as investors get a look at February inflation data tomorrow and await earnings from Oracle Corporation ORCL. For now, the market could continue to be blown around by geopolitical winds or the latest stimulus developments. Speaking of which, political pundits expect the House to pass and President Biden to sign that $1.9 trillion bill this week. 

Mixed Message

You often hear analysts talk about a “mixed” session. They might even say it about yesterday’s action on Wall Street, but it’s really not the right term when one part of the market is going in completely the opposite direction of the rest.

Monday might have been the ultimate example of the bifurcation that’s opened up between the Dow Jones Industrial Average ($DJI) and the Nasdaq (COMP). The S&P 500 Index (SPX) is kind of caught in the middle, falling just a bit yesterday while the COMP plunged 2.4% and the $DJI went up nearly 1%. The small-cap Russell 2000 Index (RUT) also started the week with gains. 

Tesla Inc TSLA and Apple Inc AAPL took a lot of the heat, falling 5% and 4%, respectively. These two were the poster children for last year’s big rally. Now it’s rough sledding for so many investors who have positions in these and other big 2020 gainers (if you think you don’t, check the mutual funds you own). 

TSLA, in particular, is just getting crushed, down 37% from the highs it posted earlier this year. TSLA joined the SPX in late 2020, and is now partially responsible for that index’s lagging performance these last few weeks, thanks to its still hefty market cap of $540 billion. Technical support for TSLA appears to be well below current levels, down near $450 a share. 

China’s stock market is also getting knocked around by Tech selling, with the Shanghai Composite down more than 8% in less than a month amid losses in Baidu Inc BIDU and Alibaba Group Holding Ltd BABA. These two are basically the Alphabet Inc GOOGL and Amazon.com, Inc. AMZN of China. 

The NDX fell below some key technical support areas near the early-January lows yesterday. It hasn’t been below 12,000 since late November, so we’ll see if that big round number holds on any further down swings. By some analysts’ reckoning, yesterday’s plunge removed what had been a bullish technical bias for the index. 

Recovery Lap

This long slide may be a tough nut to swallow for Tech fans, but it’s not necessarily all bad. The Tech and Communication Services sectors ran up huge gains last year as investors flocked to stocks they thought would do well in a “stay at home” trade. That strategy worked out well for many. 

Now there’s good news from around the world as virus rates appear to be heading down and vaccination progress is taking hold. With Covid becoming less of a force, the value trade is reasserting itself and some of the Tech premium is being spun off. What we might be seeing is a return to more normal markets, at least for now and at least as long as progress fighting the pandemic continues. 

Obviously none of this means Tech is going to zero. It’s just that valuations could get more in tune with the rest of the market. The Tech sector had a forward price-to-earnings ratio above 27 last week, according to market research firm CFRA. That’s up from 21 a year earlier and the current level of around 22 for the overall SPX. Some of the fat appears to be getting cut away. It’s not necessarily an unhealthy development, especially because a few of the downtrodden sectors of 2020, like Energy and Financials, are coming back nicely from oversold conditions. 

Seven of the 11 SPX sectors rose yesterday, and the index continues to trade roughly in the middle of the range between last week’s low near 3725 (which roughly matches the late-January low) and the all-time high up near 3950. It’s not the narrowest range ever, but it’s a range, and sometimes it’s good to see the SPX find one and consolidate.

Materials and Industrials did well yesterday, so this wasn’t just a situation where rising Treasury yields supported the banks while everyone else got left behind. Last week’s strong jobs report indicated that people are getting back to work as lockdowns recede, meaning investors might be more optimistic about growth in the underlying economy. The stimulus expected to pass Congress this week also plays a role in this, as Industrials and Materials typically tend to do well when there’s more money sloshing around the economy. 

All that cash may be on investors’ minds in what continues to be a major bond selloff. The 10-year yield, which moves the opposite way of the underlying Treasury notes, rose to 1.6% on Monday, near a one-year high. 

What Retail Investors Did Last Month

TD Ameritrade clients increased exposure to equity markets again during the February period, pouncing on some stocks that got beaten down during the month.

The IMX increased 9.26%, or 0.64, from 6.91 to 7.55. The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.

The continued rally in February matched clients’ behavior in taking on more exposure to the markets, particularly the SPX. Clients favored buys in Information Technology, Healthcare, and Consumer Discretionary stocks in February, with many driven by the cooperative monetary policy still being laid out by the Fed. Clients did seize some selling opportunities during the period as well, as some vaccine makers and other pandemic mainstays hit all-time highs. 

Apple Inc AAPL was net bought for the second month in a row on weakness as the stock traded to the lower prices since early December. Palantir Technologies Inc PLTR was also a net-buy as the stock traded lower by roughly 50% from highs during January. QUALCOMM, Inc. QCOM traded lower after a 52-week high in January and was net-bought, and so was Tesla Inc TSLA. 

Although clients were net buyers, they found some names to sell. Multiple COVID-19 vaccine suppliers were sold, including Moderna Inc MRNA, BioNTech BNTX, Pfizer Inc. PFE, and Novavax, Inc. NVAX.

CHART OF THE DAY: SUDDEN DIVERGENCE: A few months ago, the Nasdaq 100 (NDX—candlestick) and the Dow Jones Industrial Average ($DJI—purple line), were trading pretty much in sync, as this three-month chart shows. The NDX pulled ahead in January and February to reach all-time highs, but then entered a downward spiral and recently reached correction territory. Meanwhile, the $DJU continued to do its thing, making new highs of its own Monday. Data sources: Nasdaq, S&P Dow Jones Indices.  Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Nicely, Nicely: Be nice to the people you meet on the way up, because you’ll meet the same ones on the way back down. That old phrase may be on the minds of  Apple Inc AAPL shareholders now as the stock drops toward below $2 trillion in valuation. It finished Monday at “just” $1.95 trillion. That’s still enough to make AAPL the highest-valued stock on Wall Street, way ahead of Microsoft Corporation MSFT and Amazon.com, Inc. AMZN. But it’s down from a peak of around $2.4 trillion when AAPL reached all time highs above $145 earlier this year. MSFT and AMZN vie for second place at valuations near $1.75 trillion and $1.5 trillion, respectively. 

One thing AAPL investors may have on their minds is the amount of an expected dividend increase—which CEO Tim Cook confirmed but didn’t announce the value of last month. Last year, the company announced the amount of its dividend increase in late April when it unveiled fiscal Q2 earnings. Another thing that’s arguably helped AAPL’s shares over the last few years is its massive stock buyback program, which, all else equal, tends to lift earnings per share (EPS) by lowering the “S” part of the equation. Some of the money AAPL has said it plans to use for future buybacks might be funded through bonds it’s issuing, Barron’s recently reported, but with bond yields on the rise there’s concern it could get harder for AAPL to fund future bond buys. Worries that the buybacks might slow could be one weight affecting shares, meaning AAPL shareholders may have to keep being nice for a while. 

The Price You Pay: Fed Chairman Jerome Powell’s mention of inflation last week and tomorrow’s consumer price index report put the dreaded “I” word back in the spotlight. As many of us may already be aware, the CPI doesn’t necessarily tell the whole story. Take automobiles, for instance. It’s not like we go to the store and buy a car every week, but the rising prices on the auto lot do raise eyebrows even if we aren’t in the market for a Ford Motor Company F or a Tesla Inc TSLA. The average price of a new vehicle rose 6% over the last year to $40,578, the AP reported. That swift jump at several times the rate of CPI partially reflects the pandemic, which shut down many car factories and led to limited supplies. 

If you try to avoid paying up for a new car, there hasn’t been much relief at the used car dealer. The average price of a used vehicle jumped 14% last year to more than $23,000. One factor is that with fewer people renting cars and racking up miles on vacations, rental fleets aren’t showing as much wear and tear, meaning rental car companies are selling fewer of those vehicles into the used car market. Then once you have your car, you’ve got to pay up for gas, with prices recently climbing above $3 across wide swaths of the country—not just California and New York. So if someone tells you inflation isn’t a factor, maybe they take the bus. 

TSLA’s Slide Followed Bitcoin Buy: A famous 20th-century Chinese politician was once asked about the long-term impact of French Revolution. It’s too soon to tell, he said, speaking nearly 200 years after the event. It’s also too soon to tell if this Tech selloff is a long-term one or something we’ll look back on in six months as a blip. Remember, Tech also had a long slide last fall before a swift recovery took the sector to new highs.

One thing is interesting, however. On Feb. 8, TSLA announced it had bought $1.5 billion in bitcoin. Shares of TSLA climbed that day to $863, not far below their all-time high posted a few weeks earlier. Since then, it’s been almost straight downhill for TSLA and the Tech sector. TSLA shares are now off more than 30% since that purchase. Any relation? Maybe not. It’s always hard to see cause and effect, as the historian noted. However, sometimes the market crosses a rubicon, so to speak, and it’s marked by something really surprising and unexpected happening. Some analysts say the AOL/Time Warner merger of early 2000 was the nail that broke the dot-com balloon, for instance. Time will tell if TSLA’s bitcoin buy gets cited 20 years from now by historians, even if they say it’s still too soon to tell.

Tech Stocks and the Invesco QQQ ETF QQQ Were Discussed on Tuesday's Get Technical with Neal: 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Photo by Adam Nowakowski on Unsplash