SPY and QQQ closed below their 50-day moving averages for the first time in a while. Historically, the week after September quad witching is the weakest for stocks. From a statistical and technical point of view, next week might bring further downside pressure for stocks in general. Curiously, this weekend I see more and better risk-to-reward long setups than last weekend. Biotech, clean energy, social distancing stocks, many small caps, in general, are acting in a constructive manner – breaking out or setting up. There are great opportunities on both the long and the short side.
SPY and QQQ tested their 50-day moving average. The initial bounce was faded near their declining 20-day EMA. Then, both came back to their 50dma again on Friday. In the meantime, many of the momentum favorites took quick a beating last week – OSTK, W, DOCU, CVNA, etc. Most major earnings reports were heavily sold or faded – PTON, LULU, CHWY, ORCL. Small caps broke below their 50-day moving average led by weakness in financials and energy. The tape has changed.
The only thing that is still holding the indexes from breaking down is the constant sector rotation. Homebuilders showed notable relative strength on Friday as the 30-year fixed mortgage rate reached new all-time lows of 2.86%. There were also quite a few consumer cyclical stocks that broke out or are setting up for a potential breakout – CROX, NKE, UA. Can rotation save the day again? It’s quite possible but for the first time in a while, there are short setups that are looking more appealing than long setups. Some momentum leaders seem to be forming topping formations and setting up for potential breakdowns.
QQQ started last week strong and accelerated its ascent, only to be shaken by a 10% correction in two days. No one knows if we have already seen the high for 2020 but after the selloff, the odds are that chasing is not going to be as mindless as before. Many of the momentum high flyers have reached absurd valuations. Some of them will have 50-80% corrections. OSTK, for example, is already down 50% from its highs. Others will limit their drop to 10-20% and just form new bases but they will need time to do so.
The truth is that stocks still don’t have an alternative in a perpetual zero interest rate world, constant fiscal and monetary stimulus, and relatively low supply of new stocks. The capital has to go somewhere. While tech paused last week, we saw many lagging industries perking up – banks, airlines, cruise ships, hotels, retail outlets. Some of them are looking constructive and might try to break out next week.