Is it just September?
Seems only moments (days) ago that we were talking about "Goldilocks" scenarios and all would be well in the land of gummy bears and pixie dust. Even if financial markets had to go through a little volatility first.
Well, that "volatility first" part of this market seems to have arrived, though we've seen this act a couple of times before. Correct? Or is this different? The S&P 500 sold off from the end of July through mid-August. The index also sold off in mid-June.
On Wednesday, the Nasdaq Composite posted a third consecutive red candle. Unlike the first two, this one actually had some depth to it as the index surrendered 1.06% for the session. However, it should be noted that the Nasdaq Composite, which did last week put together an upside "follow-through" day, has sold off this week on lighter trading volume than it rallied on last week. The index has not given up any of its three key moving averages this week. At least not yet, despite closing just a few points north of both its 21-day exponential moving average (EMA) and 50-day simple moving average (SMA).
The S&P 500, on the other hand, has sold off this week on heavier trading volume than it rallied on last week, closed below its 50-day SMA on Wednesday, and never did put together that upside "follow-through" day that the Nasdaq Composite had. Additionally, that head-and-shoulders pattern that Doug Kass has been talking about for weeks, and appeared to be breaking as recently as Friday, now appears to have rounded the right shoulder of the pattern.
Yes, my friends... this would be bearish. For the S&P 500, relative strength is still neutral and the daily Moving Average Convergence Divergence (MACD) is yet to allow the 12-day SMA to cross below the 26-day EMA. When and if that happens, the H&S pattern above would become fully developed. That in turn, would permit the index to fall further.
The Fall of The House of Usher
Driving the negativity, as the stock is core to almost all large-cap equity indexes, including a 7.5% S&P 500 weighting, has been the heavy selling suffered by Apple ( AAPL) .
The Wall Street Journal reported that Beijing had informed government agencies that Apple's iPhone products (among other foreign devices) could not be used at or for work by employees. This comes as Chinese smartphone manufacturer Huawei, which has been under U.S. scrutiny since 2019, came out with their first cell phone in years, with 5-G like capabilities.
The Greater Chinese market accounts for close to 20% of Apple's revenue and more than 40M iPhone sales per year. It is believed that this ban coupled with the new offering by a Chinese rival could cost Apple as many as 10M iPhone deliveries in 2024. It does not appear that CEO Tim Cook has been blindsided by this move as the firm has been diversifying its production facilities into both Vietnam and India, while expanding retail operations into India's potentially larger market.
APPL gave up 3.58% on Wednesday. I have seen that stock trading down an additional 3% (trading with a $177 handle) as I work through the zero-dark hours.
Note that relative strength and the daily MACD for this name have quickly repostured themselves in a much less positive way. The stock had fallen sharply upon completion of the above rising wedge pattern (which coincided with earnings). Readers should also note that the gap created on August 4 remains unfilled and AAPL needs to trade at $190.69 or higher to completely fill that hole.
What we investors will have to decide is:
Do we think that AAPL reflects larger problems in terms of valuation and/or potentially declining consumer activity? That would be bearish. Or has AAPL, from a technical point of view, just added a handle to a cup pattern built over the past month? That would be bullish. If so, the pivot would stand at $190, and the target possibly above $225.
It should not take us long to figure this one out. Stay nimble. Own it, don't trade it? Me thinks that should the stock test and fail down at the 200-day SMA ($163), that at least a few folks are going to wish that they had traded it.
But, Artificial Intelligence...
Investors and traders also likely noticed the 3% drop in generative AI GPU king Nvidia ( NVDA) on Wednesday. NVDA is also weaker in overnight trading. Insiders such as Colette Kress (CFO) and Jensen Huang (CEO) have made recent sales, and this could be putting additional weight on the stock. There does not appear to be anything wrong or improper connected to these sales.
Those going through and reading the SEC filings will see that in both cases the sales were made as part of a Rule 10b5-1 trading plan. It appears that Huang had adopted his plan in March of this year and that Kress had adopted her plan in March of 2022.
Readers will note that though NVDA has been pressured, there has been no attempt made as of yet to crack lower trend line support, while the stock has not yet come close to piercing its 50-day SMA. The 21-day EMA could crack this morning, and that could force swing-type traders.
No, I don't even want to think about that unfilled gap that had been created back in late May. That said, traders/investors should be prepared to protect what are likely large gains in this stock, either through the use of panic points/stop loss orders, or through the options market.
I am protecting myself at the $440 level, as that is where I think I would have to admit that the 50-day line had been lost. Understand this, though, to this point, NVDA has not yet suffered any significant technical damage.
Strange, But True
Essentially, the S&P Global Services PMI and the ISM Non-Manufacturing Index (which is really a PMI survey) cover the same turf. On Wednesday, the ISM Non-Manufacturing Index for August, at the headline, printed at 54.5, up from July's 52.7 and well above expectations. New orders were strong, as were productivity, employment and unfortunately prices. This was the strongest survey for this series since February. Wow, the service side of the economy is really cooking with gas.
Not so fast, my friend.
The S&P Global Services PMI for August, hit the tape at 50.5. That was the weakest print for this series since January. Remember, these two supposedly cover the same turf. The two did not just diverge at the headline level. New Orders printed in contractionary territory in the S&P Global PMI, and as the report reads... "Signaled a marked turnaround from the sharp upturn seen in the 2nd quarter of 2023."
So, who do we believe? The market reacted negatively. Treasury yields moved higher for the session. The U.S. Dollar Index has not shown any weakness this week. The Atlanta Fed left their GDPNow model for the third quarter unrevised at growth of 5.6% q/q, SAAR. I guess the markets trust the Institute for Supply Management more so than they do S&P Global.
Are we sure we want to discount the S&P Global report? The final paragraph of said report reads... "Softer demand conditions led firms to rein in their hiring activity, as firms registered the slowest rise in employment since October 2022. Workforce numbers increased at a softer rate as evidence of spare capacity persisted and backlogs of work fell at a sharper pace." Sounds a bit too ominous to me to simply pretend that there is nothing to it.
Quotes From the Beige Book
On Labor....
"Job growth was subdued across the nation. Though hiring slowed, most Districts indicated imbalances persisted in the labor market as the availability of skilled workers and the number of applicants remained constrained."
"Growth in labor cost pressures was elevated in most Districts, often exceeding expectations during the first half of the year. But nearly all Districts indicated businesses renewed their previously unfulfilled expectations that wage growth will slow broadly in the near term."
On Inflation...
"Most Districts reported price growth slowed overall, decelerating faster in manufacturing and consumer-goods sectors. However, contacts in several Districts highlighted sharp increases in property insurance costs during the past few months. Contacts in several Districts indicated input price growth slowed less than selling prices, as businesses struggled to pass along cost pressures. As a result, profit margins reportedly fell in several Districts."
Gut Punch
Sarge-fave Lockheed Martin ( LMT) was pounded for a 4.8% loss on Wednesday after the firm reduced estimated deliveries of F-35 fighter aircraft for the year to 97, down from a previous forecast of 100 to 120. These 97 deliveries are operable with existing technology.
Lockheed had been expecting to start deliveries of F-35's with an upgrade known as "Technology Refresh 3" sometime between April and June of next year instead of late this year. In the filing with the SEC, the firm claims that it does not expect to have to amend its 2023 financial outlook.
The issue is with the development (on both the hardware and software sides) of the integrated core processor, which is manufactured by L3Harris ( LHX) . LHX was down 1.31% on the day. Northrop Grumman ( NOC) , which is another subcontractor key to the F-35 program, was down 1.73%.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 235K, Last 228K.
08:30 - Continuing Claims (Weekly): Last 1.725M.
08:30 - Unit Labor Costs (Q2-rev): Flashed 1.6% q/q..
08:30 - Non-Farm Productivity (Q2-rev): Flashed 3.7% q/q.
10:30 - Natural Gas Inventories (Weekly): Last +32B cf.
11:00 - Oil Inventories (Weekly): Last -10.584M.
11:00 - Gasoline Stocks (Weekly): Last -214K.
The Fed (All Times Eastern)
11:45 - Speaker: Chicago Fed Pres. Austan Goolsbee.
15:30 - Speaker: New York Fed Pres. John Williams.
16:55 - Speaker: Reserve Board Gov. Michele Bowman.
19:05 - Speaker: Dallas Fed Pres. Lorie Logan .
Today's Earnings Highlights (Consensus EPS Expectations)
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