It Was An Ugly Day

By: Kent Engelke | Capitol Securities

Does history repeat itself? In early 2000, the NASDAQ was making daily highs, led by Microsoft, Cisco and Intel. The 1970s term, led by GE, Nifty Fifty was resurrected, defined as all one has to do is buy and hold fifty stocks and all would become gazillionaries.

The headlines were filled with stories of which company — Cisco or GE — will become the first $750 billion company.

Fast forward to today, of these 50 stocks, about thirty five are no longer around, a vast majority — led by GE — are still down 50% from their apex and only one has rebounded to a new high — Microsoft.

Today the markets are dominated by five companies, five companies that comprised a record 14% of the capitalization of the S & P 500. The S & P 500 technology index was just at a record 25% to 27% of total capitalization of the S & P 500.

All must remember the S & P 500 is a dollar weighted index, defined as companies that have a greater share price that have an outsized impact on the averages. Gains or losses of the various indexes are greatly magnified by the higher priced companies.

Yesterday, for the first time since January 2016, the S & P 500 violated its 200 day moving average. Violations historically occur annually, however to the best of my understanding this is the longest period that this pivotal moving average line was not violated.

How will the markets respond given that according to the SEC, 50% of trades are now done algorithmically and another 40% are done by indexing. By definition, both utilize momentum not security analysis.

In my view, the combination of mega-priced/capitalized issues coupled by speed of light trading where speed — often measured in terms of a millisecond or one millionth of a second — has created a dangerous environment.

Depending upon the index, equities at one time were posting declines in excess of 3% to 4%, but managed to recover some losses to end lower between 1.9% and 2.75%.

The catalysts for the decline were fresh presidential criticism of Amazon, retaliatory tariffs from China and concerns about economic strength and inflationary pressures.

What will happen today?

Last night the foreign markets were down. London was down 0.33%, Paris was down 0.56% and Frankfurt was down 1.07%. China was down 0.84%, Japan was down 0.45% and Hang Sang was up 0.29%.

The Dow should open nominally higher. Will the upcoming earnings season support equities? All popular trades have broken down including the fail-safe momentum trade. The cross-correlated trade ended several months ago. The WSJ wrote Saturday, the proverbial safe haven trade is virtually nonexistent, perhaps the result of structural changes in market mechanics from technology based trading and excessive monetary policy.

The 10-year is off 7/32 to yield 2.77%.

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