Wednesday, June 17, 2020

[Anonymous]

Another day of out performance for the Nasdaq composite Wednesday ran into a brick wall as sellers came into the stock market during the final hour of trading. The Nasdaq came to within 9 points of the 10,000 level, led by strong showings from internet retailers, select software and semiconductor stocks. But a 1% gain faded to less than 0.2% by the close.

The Nasdaq topped 10,000 last week before Thursday’s massacre. The sell-off amounted to a key test of the 21-day moving average, where the Nasdaq ultimately found support. The stock market fired a warning shot that day, and there could be more in coming days and weeks. But until meaningful selling starts to hit the charts of leading growth stocks, there’s no reason to adopt an overly bearish stance.

Selling was more intense in the Dow Jones Industrial Average and S&P 500, but lower volume tempered the declines. The Dow Jones industrial’s gave back 0.6% and the S&P 500 fell nearly 0.4%. Small caps lagged badly, with the Russell 2000 down 1.8%.

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1. Gold and Silver prices maintain gains
2. Facebook holds above price breakout
3. The tech is real, the valuation is not

Market Moves

While most stocks pared recent gains today, precious metals ticked higher. Gold and Silver prices remain elevated suggesting investors remain nervous about what the future may bring. The chart below shows how the price of gold, as tracked by State Street’s gold index ETF (GLD), has remained in a trading channel since markets began rebounding from their lows. Though silver prices, tracked by iShares Silver Trust ETF (SLV), broke out of their initially undervalued channel, they remain near pre-pandemic levels.

The timing of the moves on gold and silver is interesting because they fell along with stocks early in the COVID-19 scare. However they rebounded more quickly than stocks, suggesting that many investors were looking to the precious metals as a hedge against falling asset prices. Now that many stocks have reached their former price levels, the logic would follow that this price premium should dissipate. The fact that it hasn’t suggests that stocks may have a bumpy ride ahead. On the other hand, if the support levels from these price channels are broken, it would signal a bullish move for stocks as money rotates out of one asset class and into another.

Facebook Holds Gains Above Price Breakout

When stocks or other assets hold a price channel it becomes something for chart watchers to interpret and traders to strategize over. The price channel on Facebook (FB) is interesting however, because it begins where the pre-pandemic highs left off.

The chart below diagrams the general trading strategy held by pattern traders for channel breakouts. Chart analysts will find this pattern interesting for a different reason. Even though the S&P 500 (SPX) benchmark index struggling to reach its former highs, it appears FB investors are already signaling that they are optimistic about the future. Should the lower level of that channel be broken, it would imply a change of investor sentiment.

The Tech is Real, the Valuation is Not

For those investors who haven’t happened to notice the incredible move on Nikola Corporation (NKLA) shares, you might just now have become aware of the latest daytime drama presented by the stock market. The most interesting plot twist is that this erstwhile small company that has never fully built a truck and sold it, now has a market capitalization bigger than Ford (F).

Strangely, the comment most people make when they find out about the company’s stock move isn’t, “how crazy is that!” but rather, “is it too late to get in?” Such is the nature of the current market and its participants. At this point the stock is well into the arena of high speculation, so it is impossible to predict whether the values will keep rising or crash lower. Bears will point out that the PE ratio is currently sitting at 1,300. Bulls will point out that this is only half the PE measure on Papa John’s (PZZA) and that Nikola has over US $10 billion in pre-orders for its commercial truck.

Astute chart watchers know that as long as this stock holds its price levels, it is a good sign that investors and traders aren’t abandoning the market. However any trading below $30 per share may signal a major change of sentiment.

The Bottom Line

Investors seem to be hanging on to their nervousness about the near future of the market as evidenced by the price patterns on gold and silver. Facebook and Nikola shares might provide some insight on whether investors are changing their minds about holding on to stocks they have purchased since the low prices in April.

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