Monday Markets: Buy the Dip Again, or Something Bigger Going on?

Monday, 17 May 2021
Wollongong, Australia
By Greg Canavan

[4 min read]

It was a busy week last week…

Conflicting signals brought about a return of volatility. ‘Inflation is back’ was the catch cry. But if that was the case, no one told the bond market. US 10-year yields barely budged.

After some heavy selling at the start of the week, Wall Street bounced back strongly on Thursday and Friday.

Is it just another ‘buy the dip’ moment? Or is there something bigger going on?

Let’s see what the market says about all this…

By the market I mean charts…the price action. Opinions are interesting, but money talks. The charts give us a good idea of where the money is flowing. So I’ll go through a number of charts today that will hopefully give you some insight into what is really going on…

The first thing to note about the increase in volatility last week is that it wasn’t broad-based. The heavy selling came in the ridiculously high priced ‘growth stocks’, and less so in the bigger, economically sensitive stocks.

I’ll show you what I mean by that in relation to Aussie stocks in a moment. But first, let’s look at the US markets.

The chart below shows the NASDAQ relative to the S&P 500. A rising chart line tells you that the NASDAQ (tech/growth stocks) is outperforming the S&P 500. But it peaked in March. The NASDAQ has been underperforming since.

Last week’s selling saw an extension of this trend below a longer-term support line:


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

This chart is telling you that there has been a rotation from growth stocks into more prosaic value/cyclical stocks.

The air is coming out of a lot of the previously hot sectors; tech, green tech, EVs, cryptos and buy now, pay later stocks.

From what I can see so far, it looks like a valuation driven move, rather than a response to deteriorating economic or liquidity conditions.

The main US indices are all in healthy upward trends. However, if the unwind in growth continues, that will put pressure on them.

The chart below shows the S&P 500 Growth Index relative to the S&P 500 Value Index. Growth stocks peaked in September last year. Last week’s selling saw growth stocks fall back to near the March lows.

It will be interesting to see what happens from here. Will growth stocks have another leg down in the weeks ahead? Or is this eight-month period of underperformance about to come to an end?


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

I don’t really know. But I’m leaning towards the underperformance in growth stocks continuing.

Let me explain why…

I consider Tesla a barometer for the speculative ‘growth’ sector. It’s one of the most grossly overvalued stocks I’ve seen in a long time. But it generated plenty of hype and momentum following the COVID crash and subsequent stimulus. The chart below shows that incredible run. But to me it looks like the bubble has popped.

It might bounce again from here after the recent sharp sell-off. But ultimately I think it’s heading much lower, as more and more punters look to hit the exit.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

It’s a similar story with Australia’s buy now, pay later pin up stock Afterpay Ltd [ASX:APT]. It had a massive run in 2020. The bulls swept aside any concerns about earnings because, well, the price was going up.

But now it’s heading into reverse…


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

The chart looks ugly. It may bounce in the short term, but the longer-term trend has now turned down. Former bulls, who were mostly only bullish because the price was going up, are now bailing on the stock.

If Afterpay represents the speculative growth mood in Australia, then it’s not looking all that rosy right now.

But ‘growth’ isn’t all about concept stocks with little in the way of earnings. Some growth stocks have genuine growth models. It’s just a question of how much the market is willing to pay for that growth.

The FANG+ Index is a good proxy on this front. It measures the performance of 10 tech companies. It includes higher quality companies like Amazon, Apple, Alphabet and Facebook, and so isn’t as nakedly speculative as looking at, say, just Tesla.

The chart below tells you that the FANG’s are consolidating within an upward trend. It bounced last week after trading down to an area of support. If it breaks down below this level, it will tell you the market is turning on even the big tech stocks, not just the specualtive plays.

So this chart is one to keep an eye on…


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

However, the Global X Social Media ETF [NYSE:SOCL] has broken below prior support levels to recently trade at the lowest price since the end of 2020. This fund tracks the performance of companies like Facebook, Tencent Holdings, Baidu, and Spotify.

Again, formerly hot growth stocks are now not so hot…


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Turning to Australia now, and the ASX All Technology Index looks like it’s started to trend down. You can see that a lower high and then a lower low recently formed on the chart. The 50-day moving average (blue line) is also about to cross below the 100-day MA (red line), which is a sign of waning momentum.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Australia tends to have larger companies that are ‘value’ stocks by definition. The ‘growth’ stocks tend to be smaller-caps.

The following chart shows the Small Ords Index relative to the ASX 20 (the top 20 stocks on the ASX by market capitalisation). Since peaking in September/October last year, the big value stocks have outperformed the small-caps.


Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

As you can see from the charts today, this is a global trend. My take is that the excess stimulus and liquidity created an absurd run up in prices at the speculative end of the market. This is now starting to unwind.

But as yet there is no evidence of a broader market downturn. This looks like an ongoing rotation from growth to value. If it’s something more serious, you’re yet to see evidence of it. 

The weight of probability tells me this trend is set to continue for the remainder of the year at least, with short-term rallies keeping the dream alive.

If you’ve been investing at this end of the market, risk management is key. Know what you’re investing in. Know what you’re prepared to lose and when to get out.

If you’re unsure of the answers, check out this risk management/portfolio management tool we recently profiled. It’s a great way to keep you on track if you feel like the volatility of the market, and attendant emotional stress, is getting to you.

It also helps with diversification, an especially important consideration in today’s markets…

Continue below for Murray Dawes’s ‘Week Ahead’ update. Today, Murray looks at why bitcoin’s break below April’s low is significant and what you should expect in coming days.

Cheers,
Greg


[WATCH] Bitcoin Breaks Key Level

By Murray Dawes

 

I try to stay away from making any comments about cryptocurrencies because they are so incredibly volatile that you will usually end up with egg on your face.

But the break below the April low of US$47,112 is quite significant and worth chatting about in my view.

When prices rally in a straight line like bitcoin has over the past year, there isn’t much support on the way down when prices correct.

There is a clear head and shoulders pattern taking shape. But there is the chance we see a double head and shoulders, which would mean we see another wave higher before the real correction begins.

I show you the current set-up in detail in the ‘Week Ahead’ video above.

Regards,

Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader