Morning Market Thoughts
Good morning. Tech is down once again, with Nvidia (NVDA) down $3.77 (-2.5%) to $145.87, Amazon (AMZN) down $5.50, which is just 0.6%. It’s trading at $973.20. The Nasdaq Composite is down 39 points, and the S&P is down just 3 points. So the selling in tech continues, though NVDA and AMZN bottomed out around 8:30 this morning. It’s always a coin flip when deciding whether pre-market moves have any relation to what ultimately occurs during the trading day. Liquidity is very thin, and the big moves you see in pre-market trading can be totally wiped out by 9:32 am.Here’s my take on the current state of things. I am a seller of tech stocks on any strength. I’ve seen this type of volatility before, though it does not happen a lot. And the fact that it is a rare occurrence makes it even more significant to me. These types of sharp sell offs that occur response to a random note about one particular stock reveal the extreme complacency in the market. The general feeling on Wall Street seemed to be that tech stocks will move up forever. The VIX had been trending lower since a meager “peak” at 16. It finally bottomed on Friday at 10:30 am with an intraday low of 9.39, and then tested that bottom at 11:10 am. The S&P rolled over in perfect sync with the VIX 11:10 test, while the Nasdaq Composite started rolling in sync with the first tag of 9.39.
So we can see that this selloff is highly correlated to VIX levels. While it has largely been a waste of time to analyze the VIX for the simple reason that it has shown extreme complacency since its last peek above 20 on Friday, November 4th (the week prior to our general election), I think it’s critical to track it now. Don’t forget about the FOMC meeting on Tuesday/Wednesday after which they will announce their decision on rates, and will also give their latest prognostications on the economy (always wrong, but market moving nonetheless). If the selling continues and the VIX springs higher to 15-16, it could signal a short term buying opportunity. When I started trading, the extreme lows of the VIX were at around 18 points, with the extreme highs at around 50. So you can see how things have changed throughout the years. Once extreme levels persist for long periods of time, they become the norm. They are no longer “extreme”.
So we are trading in an environment where complacency is a pervasive market condition with little utility other than to support anyone who says, “Man, the VIX is really low. Lots of complacency in the market.” These days, remarking on complacency in the market is about as insightful as revealing the fact that stocks trade a lot between 9:30 and 11:00 am on weekdays.
So keep an eye on the VIX. It matters now — at least for the next few weeks.
Also, don’t ignore the weakness of the FANG stocks. Those have been the leaders for a long, long time. At some point, the institutional sponsorship will drop noticeably as the institutions start taking profits by selling their stock to the latecomers who are still eager to buy. But make no mistake — when institutions flip from buying to selling, there is not enough demand in the market to prop up these stocks. So set your levels on your stocks, and be rigid in your stops. This week will be volatile, and that is a tough environment when you are used to tame markets.
See you in the forum.
–Dan
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