The big tech stocks drove the coronavirus stock market rally higher from its crash that had formed a trough in March this year. However, the tech-savvy index, the Nasdaq
Investors wonder if the tech heavyweight index can hold on to its gains, and if not, then the bubble must have burst. This means the U.S. stock market is about to face a difficult time.
What is the Stock Market?
The term stock market mostly refers to the S&P 500 index. The S&P 500 isn’t the accurate representation of the whole U.S. stock market; it characterizes the largest 500 American stocks. Thus, when one hears the word “stock market” in the media, the reference is towards the S&P 500 index’s performance.
Are Stocks Going Up or Down?
The U.S. stock market has gone through topsy-turvy trading sessions this week. The Dow Jones Industrial Average is firmly in the red for this year; it is down 3.52%. The Nasdaq Composite is down nearly 10% from its all-time high but still holding on to gains for this year. It is up almost 27% year-to-date (YTD).
The below chart best describes the S&P 500 index’s price action. The S&P 500’s price chart shows that the index has erased its gains for the last few days. However, the S&P 500 is positive this year, and it is up by 3.36%.
Bubble: Big Tech Stocks have become Wimpish
The question on most traders’ lips is whether the big guy on the street has become a wimp, meaning the Nasdaq Composite index lost its mojo. One thing is for sure: the current selloff, and a possible stock market crash, is being led by the tech sector.
The coronavirus stock rally has been dubbed as one of the most unloved rallies since the financial crisis. Speculators and money managers have been calling it all along by saying that the current stock market rally is mainly led by a few stocks. They are Amazon
My view of the U.S. stock market is that we need the support of those who have been propping this stock market higher. If these tech investors begin to fold, this stock market will crash like there is no tomorrow.
Bears Are Smelling Blood
Importantly, this week, we had some serious technical levels tested for the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average. The technical price level that I am referring to is highly regarded among institutional investors and the smart money, and that is the 50-day simple moving average.
All of the three indices have tested this moving average on a daily time frame and Nasdaq traded briefly below this moving average. However, all the three indices bounced back up fairly quickly from their 50-day SMA, suggesting bargain hunters stepping in.
The reason that bears are smelling blood on the street is that these averages have started to roll over once again. All three U.S. indices are still trading above these averages, but their price action’s weakness doesn’t bond well with bulls.
How Will We Know if The Stocks Aren’t Going to Crash?
The biggest indicator for this stock market crash is if the Nasdaq Composite index falls below the 50-day SMA, and it stays below this average. This will indicate that the Big Tech stocks have fallen out of love, and there is more pain for this coronavirus stock market rally on the way.
Key Upcoming Catalysts
- FOMC statement—Sep 16
- U.S. stimulus negotiations are still ongoing- Date TBA
- First U.S. election debate- Sep 29
- Deadline to fund U.S. government-Sep 30
- AstraZeneca still targeting to release first vaccine doses, possibly October
- Brexit deal deadline (set by the U.K. government) —Oct 15
- FDA / Vaccines and Related Biological Products Advisory Committee open session- Oct 22
- Moderna, Pfizer
PFEvaccine Phase 3 results are expected in November.
- U.S. Elections- Nov 3
The Bottom Line
The mega-tech got bashed this week, and the reality is that there could be more of this in the pipeline. Going into next week, both traders and investors are going to keep a close eye on two things. Firstly, the Nasdaq Composite’s price action will assess if life is coming back to the mega-tech stocks. Finally, the Federal Reserve’s monetary policy stance and its unwavering support for the U.S. economy are crucial for the stock market.