The stock market saw a bit of a pullback yesterday, but the decline came on average volume and breadth that was not all that bad. (Just 1.5 to 1 negative on the S&P 500 Index.) Therefore, it was not a broad decline. Instead, it was a small number of highflying tech names that bore the brunt of the weakness.
As we had highlighted last week (TSLA) and early this week (NVDA), several of these names had become extremely overbought on a near-term basis, so it was inevitable that these stocks would see a meaningful decline (whether they’re going to move higher over time or not). We also noted that both the S&P 500 and the Nasdaq Composite had also become quite overbought, so this pullback is not a surprise at all.
The futures are bouncing back a bit this morning, so the question is whether the mild two-day decline we have just experienced is all we will get…and that we’ll see the market bounce-back and regain its strong upside momentum immediately.
We don’t think so. Yes, every little decline since early October has been followed by a very quick bounce, but those previous declines did not come from overbought levels. The two-day drop we have seen has still left the S&P and Nasdaq at/near overbought levels…and stocks like NVDA are still well into overbought territory. (It’s still overbought, it’s just not as extremely overbought.) With this in mind, we think that we’ll see more downside movement in the broad market as we move through the middle of November.
This does not mean that this morning’s bounce in the futures will not hold, we just think that we’ll see more weakness before we get through next week. When the stock market gets as overbought as it was at the beginning of this week, it takes more than 1-2 days of downside movement to work off the overbought condition.
The big focus today will be on DIS. They missed the consensus earnings expectations as the growth in their streaming services is slowing. The stock has been dead money all year. As of last night’s close, the stock was down 3.7% YTD. However, given where the stock is trading in the pre-market, it will be very close to correction territory (down almost 10% on the year).
More importantly, however, this morning’s decline will also take DIS below the lower line of a “descending triangle” pattern. Therefore, unless this stock bounces back VERY quickly, some significant technical damage is going to be done. (It doesn’t have to regain that line today, but it does have to do it within a few days, or the damage will be done.) Therefore, investors should be careful about buying the dip on this one.
The activity in the marketplace today should be dampened by the fact that it is Veteran’s Day and the bond market is closed. (This will obviously weaken activity in the interest rate sensitive groups in particular.) Therefore, it could/should be a relatively quiet day in the stock market, so things could calm down a little bit (at least for one day).
We’re sorry, but it’s ridiculous that the market is open today. No, we don’t care about getting a day off. We just think that it is a disgrace that Veteran’s Day is not a full national holiday. What are we thinking when we cannot honor the men and women have worn the uniform of our armed services (and those who wear it today)???
Since I do make the decisions about when the stock market is open and when it is closed, I’ll to what we do every year on this day. I’ll thank all of those who serve (and have served) to protect our freedoms and our way of life in America. There is no way any of us can show our full gratitude, but I can tell you one thing for sure…the American flag is flying on my house today. If anybody thinks I’m making a political statement by doing this, you can go stick it in your ear!!! I’m merely showing my appreciation for those who are willing to protect our country with their lives.
We have a lot of problems in this country, but I wouldn’t want to live anywhere else.
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.