Crazy Train!

Crazy Train!  Yesterday’s trading day was not quite as off-the-rails wild as Ozzy Osborne’s crazy train, but it was nonetheless quite a ride for some, especially if you were a technology stock.  Technology continued its selloff yesterday pulling the tech-heavy NASDAQ down -0.9%.  Though it closed well off its lows of the session, the index is in a peculiar technical position with only its 7300 Fibonacci retracement line for support (see chart 8 in my attached daily chartbook).  It should also be noted on the bottom panel of the chart that its important mid term momentum (orange line) is losing steam and trending slightly down (black trend line on bottom panel), which indicates the possibility of a rotation out of the hedge fund go to’s of early summer.  Research from UBS shows that 13 out of the 20 most popular stocks held by hedge funds were from the tech sector and 9 out of the 10 most popular stocks held by growth fund managers were from the sector as well.  That is probably not surprising but its implication should raise some eyebrows.  On Wall Street we refer to that as a “crowded trade” in which many investors rush into a popular theme only to be caught in a liquidity squeeze as traders rush to the exits usually ending up in losses.  If we look back to this past earnings season we would see that while most tech stocks beat bottom line estimates (earnings), many came up short on top line (revenue) or other metrics.  So while the sector may have done well overall, there were some small fissures appearing in the foundation.  The tech sector can be further broken down into industries and within the tech sector,  Semiconductors group tends to be one of the most volatile and typically serves as an early indicator. That means if Semiconductors start to rally, the larger sector tends to follow and um… vice versa.  Vice versa kind-of happened yesterday as chip maker Micron Technology announced that memory price points were going down and would likely affect performance in the future.  It didn’t take too long for the announcement to cause a selloff in Semiconductors along with the broader tech sector, which was already weak on the session. Micron closed down -9.9% yesterday making it the S&P500’s worst performer on session.  Now I have to mention it, but if you have been reading my note on a regular basis you will already suspect that the NASDAQ 100 must have had a tough day relative to its peers – and it did, in fact losing more than the other major indices.  Speaking of those, the Dow Jones industrials managed to pull off a positive close yesterday after shifting between red and green at least three times throughout the session.  Though traders tried hard, they were unable to get a close above that critical 26000 level but they did manage to reach it early in the session (see chart 6 in my attached daily chartbook).  The shift from growth to defensive affected the growth-oriented small cap Russell 2000, which also traded off in yesterday’s session.  The favoring of defensive over growth can be clearly seen on chart 16 in my attached daily chartbook as the indicator continues to trade down.  In fact the blue dashed line in a negative slope indicates a short term downward trend compared to the longer term positive trend (pink dashed line). While it’s still too early to tell if the trend will continue, its should certainly be noted and if hedge funds are de-risking their tech positions… well you know what happens when crowded trades reverse themselves.  

Today, we will receive the monthly employment situation from the Bureau of Labor statistics.  The number, which is released on the first Friday of each month, is perhaps one of the most influential of the releases. Why?  The Federal Reserve has a duel mandate to fight inflation and to keep employment healthy and this number is one which gives us insight into both metrics.  On the labor market we will see how many new non-farm jobs were created and that is expected to be up 191k after last months 151k rise.  We also get a glimpse of the unemployment rate, which is expected to have fallen to 3.8% from 3.9%.  On the inflation front, the release covers change in average hourly wages.  Recall that inflation is highly sensitive to employment costs because it represents a significant percent of production cost and when it starts to increase due to tight labor conditions, we can expect prices to consumers to increase as producers pass on the cost increases.  That is classic inflation, which the Fed fights by raising interest rates, amongst other things.  So traders interested in what and when the Fed might do next would be watching those numbers carefully and wages are expected to show a growth +2.7% year over year.  It is largely expected (99% probability) that rates will be raised at this month’s FOMC meeting, but a December hike is still in question with only a 67% probability at this point.  So traders, especially bond traders, who have been quite active this week will be on coffee number two by the time the 8:30 AM number crosses the tape.  I will be 2 coffees and at least 1 ristretto in by that point because riding the crazy train takes focus.

daily chartbook 2018-09-07