Daily Market Notes: 3-25-2021

Yesterday’s messed-up lower session pointed out a couple of things that I have been saying for a long time, and the first is that when the Dow and Nasdaq are going in opposite directions, such as we have seen a lot of lately, the market invariably goes in the direction of the latter, namely because it is much more populated to the tune of 30 stocks versus around 3,000. The second is that for the third time in the past week, the market is vulnerable to setbacks because the VIX has reached major support and when it is at support and it bounces higher, the only way that this can happen is by stocks going lower and sadly we saw an example of that as well.

So when the Dow was up by a strong 364 points at its mid-morning high and the S&P was ahead by 32, the VIX plunged down to as low as 19.3, which is major support and then one has to ask the question – would you rather be long or short the market at that VIX price? And the answer is that the indices have now pulled back on no fewer than three occasions this past week because of the low VIX and so be it, unless for some reason it can make a clean break below that support all the way down to its ultimate support level of under 10, which does not seem possible in the charged-up volatile situation that we are dealing with now.

So even when the Dow and S&P were on their highs, the Nasdaq began to go negative courtesy of real weakness in the stay at home former darlings such as DOCU, PTON, ZM and ROKU, which have all probably seen the best levels that they are going to see for a long time now, in addition to the really soft FAANG group. And that was all she wrote, so to speak, as the Dow collapsed from that nice morning high to have the nerve to end with a closing decline of 3 down to 32,420. It was hurt by losses in BA, DIS, GS, MSFT, NKE and CRM while AXP, CAT, CVX, HD, HON, TRV and UNH did well.

The S&P got really messed up because it contains those large tech stocks and turned that 32 point advance into a final lower close of 21 down to 3889. And as was mentioned, the Nasdaq was a real disaster once again with a 265 point shellacking down to 12,962 and is now 8% off of its record high and getting closer once again to a full-fledged correction even as many of its important members are in bear markets of their own with declines in excess of 20%, TSLA being the most prominent example.

The Russell 2000 Index of small stocks also took it on the chin for the second day in a row with another large decline, this time of 51 down to 2134 and the VIX ended higher at 21.20 after reaching support as mentioned above.

And go figure that things collapsed despite bond yields going lower, with the 10-year Note at 1.62% and wasn’t this the “explanation” for the technology stocks starting to go down because of the higher yields at 1.75% last week, so can someone please explain why the lower yields were not friendly to this group yesterday?

Investors also had their eye on Washington, where Federal Reserve Chair Powell and Treasury Secretary Yellen testified before the Senate about the government’s efforts to combat the economic impact of the coronavirus pandemic. The Biden administration is considering up to $3 trillion in additional spending on infrastructure, green energy, and education.

Yellen believes the U.S. government has more room to borrow but said higher taxes would likely be required in the long run to finance future spending increases. Meanwhile, Powell re-iterated that the recent jump in the yield on the 10-year Treasury, which soared from less than 1% at the beginning of the year to 1.62% yesterday, was mostly a sign of confidence among investors that the economy is improving.

Bond yields have risen this year as traders have been watching the potential for inflation pressures to pick up after struggling economies were flooded with credit and government spending. That has depressed U.S. bond prices, prompting some to shift money out of stocks.

While rising interest rates are a key concern, the pandemic remains a dominant topic for investors. Stocks fell on Tuesday after Germany, Europe’s biggest economy, and the Netherlands extended lockdowns and imposed new travel and business curbs in response to spikes in infection. That followed similar moves earlier by Italy and France.

Traders are also juggling worries about the speed of vaccine distribution, COVID-19 cases and the potential for future tax changes crimping corporate profits as there is that lingering feeling that we are not quite done with COVID-19 yet at all.

GME got blasted to the downside by 34% after reporting results that missed forecasts, though the stock is still up more than sixfold since the beginning of the year after it became a social media darling for its fanatical group of online followers. The company took no questions from investors on its quarterly conference call late Tuesday. And it is really sad to see all of these unsophisticated investors lose their money by purchasing high out of the money calls that have very little chance of being reached. On the other hand, they get swept up in the frenzy of these social media touts who encourage them to do this, much to their ultimate chagrin and loss of their entire purchase price that they put up to buy these items.

This week sees a few earnings reports before the start of the first-quarter reporting season in April, two weeks away. The lineup is: yesterday – WGO higher and ADBE, GME, GIS lower; today – KBH lower and RH, DRI higher.

Economic reports will have: yesterday – February durable goods orders fell by 1.1% overall and non-defense capital goods orders excluding aircraft were lower by 0.8%; today – weekly jobless claims fell to 684,000 and third and final estimate of 4Q G.D.P. came in better at 4.3%; Friday – personal income and spending, final March U. of Michigan Consumer Sentiment Survey. 

Donald M. Selkin

Chief Market Strategist

 

Disclosures:

Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.