Hello [MM_Member_Data name=’firstName’],
U.S. stocks are lower, led by further downside in tech stocks. Blue chips are substantially stable in light of the fact that FED is widely expected to raise rates later in the week.
Global Economy – European stocks are down at a 3-week low as last Friday’s sell-off in U.S. technology stocks spreads across the globe. Apple is down 2% in pre-market trading, adding to Friday’s -3.9% plunge, after Mizuho Securities downgraded Apple to ‘Neutral’ from ‘Buy.’
Technology stocks that supply Apple are declining as well with ASML Holding falling 4% and leading European technology stocks lower.
Expectations for a 25 bp increase in the fed funds target range at Wednesday’s FOMC meeting is also fueling long liquidation in equities.
Losses in technology stocks led declines in Asian markets as Samsung Electronics slid almost 2% and Tencent Holdings Ltd tumbled 2.5%.
Japan May machine tool orders rose +24.4% y/y, the sixth consecutive monthly increase.
Japan May PPI was unch m/m and +2.1% y/y, weaker than expectations of +0.1% m/m and +2.2% y/y.
U.S. Economy – FED is widely anticipated to raise rates at Wednesday’s FOMC meeting which begins tomorrow. Major reports for the week aside from FOMC include industrial production on Thursday and consumer sentiment, which comes out on Friday before the opening bell.
I’m anticipating increase in volatility and spike in VIX Index levels over the near term, since tech sector is becoming increasingly vulnerable to downside pressure as momentum levels and price levels point to both increase in volatility and downside pressure, which goes hand in hand.
Market Sentiment – Bonds are demonstrating increased weakness ahead of Wedneday’s FOMC minutes as the FED is widely expected to raise rates.
Keep in mind, there’s a natural inverse correlation between interest rates and bonds, where one goes up the other goes down, therefore expect long bond to revert back to the main trend, which has been congesting and exhibiting non directional trading action over the past several months.
Also note, higher interest rates put pressure on the overall stock market, especially key sectors such as financials, which are already vulnerable and trading near the 50 day line to the downside.
Expect more congestion since FED is transparent and there’s no major Global uncertainties on the horizon, but prepare to fade rallies, more downside and congestion over the near term, as bonds revert back to their main trend and prepare for further rate hikes ahead.
Stock Market Analysis – I hate to say I told you so, but tech is leading the market lower as we’ve anticipated over the past few weeks. SOXX is approaching the 50 day line and increasing selling pressure into the broader QQQ, which tracks the top 100 tech and growth stocks in NASDAQ Index.
Expect more downside in the chip sector since volatility is finally increasing.
I always warn traders to focus on volatility levels, since increase in volatility is negative for the stock market and you can see by the graph above of the semiconductor index as well as the chart below of the NASDAQ 100, that volatility levels on Friday were bigger than anything we’ve seen so far in 2017 and increase in volatility levels can cause markets to congest and lose directional bias, which we haven’t seen since last year’s November elections.
Expect QQQ to violate the 50 day line, but remain bullish, unless we see further volatility spikes, which are not anticipated, unless Global uncertainty increases.
Fund activity is lower than average and declining till September and I’m not expecting major corrective pressure. If volatility levels can stay at current levels and if current downside pressure doesn’t spill into the overall stock market, then the odds of seeing more upside over the near term is highly probable.
So far SP is staying fairly resilient, since the selling pressure is highly concentrated in the tech. But if we begin seeing financials and retail stocks weaken further, we can anticipate more downside from the overall market.
The 2 main factors to pay attention to at this time is volatility and impact of tech on the overall stock market. If selling pressure doesn’t spill into NYSE or Dow and if VIX doesn’t spike dramatically, then the odds of seeing upside over the near term is highly probable.
I will update you tomorrow as usual.
Roger Scott
Head Trader
Market Geeks