The stock market had another tough day on Thursday, with equities getting hammered once again in the aftermath of the Fed’s decision to raise the Fed Funds Rate on Wednesday by 25 basis points. Tightening monetary conditions are not the only issue on stock investors’ minds, however, as ongoing concerns over global growth, the trade war with China, shifting geopolitics and other issues continue to weigh on sentiment.
Tech Stocks Pounded as Nasdaq Dips into Bear Market Territory
Thursday was particularly ugly for the tech-heavy Nasdaq. The index was down about 3% at the lows of the day, putting it down over 20% from its record high reached at the end of August. The market did see a bit of a bounce, however, and finished the session down about 1.6%, or 19.7% lower from its August high.
A market is generally defined as being in a bear market when it has declined by 20% or more from its highs.
The FAANG stocks, including Facebook, Amazon, Apple, Netflix and Alphabet, have been hit particularly hard in recent months and have all entered into bear market territory. These equities have been widely considered the “darlings” of tech and have been a major factor in the Nasdaq’s push to record highs this past year. How times have changed, however, as these stocks are now some of the primary forces dragging the index lower.
The Dreaded Death Cross
All of the FAANG stocks have entered into a death cross in recent weeks, with Apple finally flashing this important technical event on Thursday. A death cross is when a stock’s 50-day moving average declines below its 200-day moving average, signaling a change in trend from higher to lower. In Apple’s case, the appearance of this technical downturn has forecast some serious weakness in the past. According to research from marketwatch.com:
• “The last death cross appeared on Aug. 26, 2015, when the stock closed at $109.69, or 17.5% below the Feb. 23, 2015, peak of $133.00. The stock shed another 17.6% before bottoming three months later, at $90.34 on May 12.”
• “A death cross occurred on Dec. 7, 2012, when it closed at $76.18, or 24% below its Sept. 19, 2012, closing high of $100.30. The stock didn’t bottom until it fell another 26.8% to $55.79 on April 19.”
• “About a week after the Lehman Bros. collapse turned a recession into a full-blown financial crisis, Apple’s stock produced a death cross on Sept. 23, 2008, as the stock closed at $18.12 that day, down 33.2% from its previous bull-market peak of $27.14 on May 13, 2018. The stock plunged another 38.4% before bottoming at $11.17 on Jan. 20, 2009.”
A simple way of looking at the current technical outlook in these stocks is investors having flipped from a “buy the dips” to a “sell the rips” mentality. Stocks investors may take an increasingly bearish approach to the market and all indications are that more declines will be seen in the weeks and months ahead.
The major indexes carving out fresh lows would seemingly indicate that the worst is yet to come. The CBOE’s VIX index, a measure of market volatility, hit an intraday high yesterday of over 30, the highest reading since last February. Although the index settled off those intraday highs, its elevated levels also point to more turbulence ahead as investors are increasingly willing to pay up for put protection.
What’s Behind the Selling?
There are numerous market dynamics currently at work that are fueling risk aversion and market declines. This week showed just how sensitive stock investors have become to the Fed and also demonstrates how the central bank’s tightening of monetary policy could potentially fuel a recession. Although the Fed has lowered its rate forecast for next year from three rate hikes to two, markets seem to believe that the central bank is hiking too far too fast. With many economic indicators already showing distress and little inflation to speak of, this is arguably a major cause for concern.
The ongoing war over trade with China is also having a measurable impact. Despite some recent optimism that a deal will be reached, investors appear quite concerned that the situation could escalate from here. The war on trade is having a significant impact on China already, and as the world’s second-largest economy, any further slowing in the region could spill over into global markets.
There is also the state of U.S. politics. Yesterday’s resignation from Secretary of Defense James Mattis, while not a surprise, took some off-guard. He is yet another senior official leaving the Trump administration due to major differences in opinion at a time when the stakes are extremely high. With a democratic House set to take over in the coming weeks, concerns are mounting over the administration’s ability to implement its agenda.
The gold market is trading slightly lower today after blowing through previous resistance yesterday. As of this post, spot gold is down $5.97 per-ounce at $1257.62. Price action yesterday would suggest that the yellow metal is seen as a potential safe-haven for investors, and with a high likelihood of further market declines and volatility, the metal may be well-supported for the foreseeable future.
In addition to the potential bear market in stocks, a weaker dollar could also act as a major catalyst for higher gold. The dollar index is seeing a bit of a rebound today after flirting with the $96 level yesterday. A breakdown below $96 on a closing level could set the stage for a fresh and significant leg lower that could in turn keep a strong bid in gold and other dollar-denominated asset classes.