We think that the action in the gold market yesterday...and the reasons being given for that move this morning...is a classic example of how Wall Street (stupidly) tries to give a fundamental reason for EVERY SINGLE move in the markets...even short-term ones. The fact of the matter is that gold’s sharp decline on Tuesday...it’s biggest one-day drop in seven years...had very little to do with any new fundamental development. As we had been saying for several days, gold had become so extremely overbought (with a RSI chart reading at 90)...and so extremely over-loved (as bullishness among futures trading reaching 93%)...that gold had nowhere to go but down over the near-term.
This morning, we hear/read that some pundits are saying the reason gold fell so hard because we got some positive news about a vaccine for the coronavirus. Really??? The claims out of Russia from Vladimir Putin were ridiculous...and the Moderna deal for 100 mm vaccine doses was not surprising-news (and it only entails a vaccine “candidate”)......We also heard that gold rallied due to the sharp rise in interest rates. Say what??? Long-term interest rates jumped yesterday because inflation data (PPI) came in stronger than expected. Guess what? Higher inflation is POSITIVE for gold, not negative!!!! In other words, the fundamental news for gold yesterday was bullish...and yet gold still got clobbered.
No, we’re not trying to say that the fundamentals don’t matter. They always matter over the longer-term. However, sometimes...when too many investors move to one side of the boat on a given risk asset...that asset has no place to go but in the other direction of its recent trend. THAT’S what happened to gold yesterday.......Of course, the momentum-based algos also played a role, but they played a role on the upside as well!!!!!!! (It’s comical how many pundits never give credit to these momentum-based traders on the upside...but always give them LOADS of blame on the downside.)
The reason we’ve spent so much time this morning talking about the fact that risk assets can sometimes see outsized moves (in either direction) even if doesn’t make sense on a fundamental basis is because we’ve seen the same kind of parabolic moves to the upside in many of the mega-cap tech stocks over the past few months. Therefore, they have become ripe for surprising reversals. Yes, there ARE some very good fundamental reasons why many of these names have rallied in a significant way, but it can also be argued that the momentum based algos pushed them higher than the new fundamental news would have justified. However, even if 100% of their moves were justified, they can sometimes become so overbought and so over-loved that they have no place to go but down.
Therefore, yesterday’s decline in many of these names...after their recent parabolic rallies...might be a signal that we’re going to see some surprising declines. We have highlighted several times over the past week or two how many of these names have become quite overbought...and how their rallies have flattened out over the past couple of weeks. Therefore, they have become ripe for corrections of 10% or more. Heck, if AAPL fell 20% from its highs, it would still stand more than 10% above its record highs from February!!! In other words, if these names fell 15%-20%, it would cause a big increase of fear in the market place, but it wouldn’t do much technical damage...and it would not necessarily mean that their fundamental pictures had changed. It would simply mean that they were experiencing a normal and healthy correction...after an outsized rally.
Of course, just because those mega-cap tech stocks got hit pretty hard yesterday...does not mean they’re about to begin significant declines. Right now, the futures are trading higher...as are all of the 5-7 mega-cap tech stocks that everybody is focused-on right now. Therefore, the rallies in these names just might continue unabated for many more weeks (or months). However, as we have seen over the past few trading days in gold, it is not out of the question that these stocks could fall in a meaningful manner over the short-term...even if their longer-term upward-sloping trends remain intact.
Therefore, we’ll be watching these names very closely over the next week or two. If this morning’s bounces end up becoming sustained advances once again, it’s going to be quite positive for these key large-cap names. However, if they stall-out...and roll back over and take-out their July lows...it will tell us that a more significant correction is going to take place.
On an intraday basis, gold has already fallen more than 10% (when it reached its overnight lows...before it bounced early this morning). That decline only took four days...so it could easily still fall further over the near-term. Thus it is not out of the question that other assets that have seen sharp rallies in recent months...could see some outsized declines as well.
We remain very bullish on the intermediate-term and long-term potential for gold...and we acknowledge that the fundamental outlook for the most of the mega-cap tech stocks remains fabulous. However, history tells us (and gold just showed us) that the fundamental outlook for a risk asset can sometimes mean nothing when it comes to the short-term movements in that asset...when they become extremely overbought and over-loved. Therefore, even though the S&P 500 is on the cusp of breaking it February all-time highs, we believe investors will have to remain nimble over the coming days and weeks.
We have some thoughts about Joe Biden’s pick of Kamala Harris as his running mate, but since this morning’s piece is already longer than usual, we’ll save most of our comments for our weekend piece. We will say, however, that she should help Mr. Biden’s chances. She is very effective at attacking her opponents...and if she can help increase “voter turnout” among people of color...like Obama did and Hillary did not...it could make a big difference in states where the vote is quite close. (As always, this has nothing to do with whether we think the Biden/Harris ticket should win. We’re just saying that Sen. Harris should help the ticket.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.