A Harrowing Friday – Momentum Stocks Continue to Break Down
The release of Friday’s payrolls report was the worst of all worlds for the US stock market. This typically happens in bear markets: suddenly fundamental data that wouldn’t have bothered anyone a few months ago are seen as a huge problem. Why was it seen as problematic?
The report somehow managed to be weak and strong at the same time – it showed weakness in payrolls growth, but the entirely artificial U3 unemployment rate, which is distorted by the fact that a huge number of unemployed are no longer counted as unemployed, but rather as simply having “left the labor force”, fell below 5% at the same time.
Photo credit: Mike Kemp / Getty Images
This fact should keep the labor market-focused Keynesian leadership of the Fed (primarily Ms. Yellen herself) from moving very swiftly toward a loosening stance – although everybody knows this is what will eventually happen anyway. Does it actually matter? Not in reality, but it certainly matters to an already frayed market psychology.
If there is one chart that describes best that the US stock market has a really big problem now, it is probably this one:
The ratio of the Nasdaq 100 Index to the S&P 500 Index. The Nasdaq, which is primarily driven by big cap tech stocks was the one leading sector that still managed to hold things together while market internals deteriorated throughout 2015. Now its relative strength is beginning to break down as well.
As we have pointed out previously, the same thing has of course happened quite some time ago to other sectors that have been leading the bull market from the 2009 low. Here is a longer term chart showing two of them – small caps and transportation stocks – relative to the S&P 500:
The RUT peaked against the SPX in early 2014, the Transportation Average in late 2014.
On Friday traders were rudely reminded of the fact that overvalued momentum stocks can actually go down as well as up – and they can do so quite violently. In the “social media” sub-bubble, companies are competing for people’s time. Since the day only has 24 hours, there are just so many things people can focus on – and it seems obvious that some of the companies competing for people’s attention and time will have to lose out in this contest, or will find that the pie they are competing for does actually not provide unlimited growth opportunities for all contestants. Shareholders in LNKD (Linked-In) received a harshly worded memo on Friday, so to speak:
LNKD lost 43% or $11 billion of its market cap on Friday.
Numerous momentum stocks that are vastly over-represented in nearly every hedge fund and mutual fund portfolio (including the one run by that famous hedge fund in the Swiss Alps, the SNB) have broken important uptrend lines on a daily basis and in some cases on a weekly basis as well. Here are three prominent examples:
AMZN, TSLA and NFLX – three favorite momentum stocks have broken their uptrends rather decisively.
We could have added many more stocks to this list of course – for instance, the biotech sub-bubble has been deflating rather quickly as well in recent months (it is under pressure since last summer in fact), but the above should suffice to get the point across: the final piece of the longer term puzzle has fallen into place, as it always does at these junctures.
The most egregiously overvalued “story stocks” always tend to have enormous blow-off moves at the end of an advance, while concurrently more and more market sectors are already entering bearish trends. They are thus always the very last stocks to peak. Once they do top out and begin to turn down decisively, it suddenly becomes clear to everyone that the market regime has turned from a bullish to a bearish one.
Leave A Comment