Date: September 8, 2020

Bears Not Ceding After Friday’s Reversal

After Thursday’s major rout in the stock market, especially in the much ballyhooed mega tech sector, investors found out super quickly that their love affair with the Fab Five Plus is now a two-way street. Yes, indeed folks, Apple, Amazon, Facebook, etc. can do down even faster than they rallied. While most investors did not enjoy that behavior, it is a welcomed return to more normal activity. It’s also something I warned about last month when I wrote about selling the “precious” Apple. And that’s exactly what I did in accounts that held it. I reduced our exposure.

Friday’s action saw the major stock market indices close well off their lows. That’s usually a good sign that the bulls are trying to put up a stand. However, overnight action is decidedly negative and it looks like the bulls are in for a rough morning. Keep an eye on the intra-day lowest points from Friday. If they are closed below this week, we could see some trap door selling, meaning a quick whoosh lower that creates some real fear. My preferred scenario would have the bulls step up sometime between Tuesday afternoon and Thursday morning for a bounce. If that’s the case, I would expect to hear lots of chatter that we just saw another routine, sharp pullback in an ongoing bull market. I would also expect to hear lots of positive comments on buying the Fab Five Plus.

Since mid-July, I have been writing about the plethora of cracks that keep appearing in the stock market’s foundation. I have been concerned about tech’s meteoric rise compared to the rest of the stock market. I have been worried that sentiment has become giddy and even greedy. Even participation has waned over the last four weeks while the major indices powered higher. Stocks were ripe for weakness, but there was no ideal timing to this.

The pullback is here. Incumbent election years typically do not see even a 10% correction on a monthly closing basis. Volatility is high and that needs to calm down a bit. Let’s see if the bulls can muster some strength and which sectors lead. The market can quickly turn from buying the dip to selling the rallies.

A few things are clear. This broad-based decline certainly has nothing to do with Tesla not being added to the S&P 500. That’s pure nonsense.It also is not due to Softbank’s billion dollar plus options position in the Fab Five Plus as of June 30. And it’s not due to the better than expected employment report last Friday. Oil may be the canary, but that’s a stretch right now. I am keeping an eye on comparisons to early 2000 as well as 1973.

And by the way, to answer a likely asked question, the nice and tidy analog to 2009 is breaking down, like they all do eventually.




Paul Schatz, President, Heritage Capital