Can Joy Return To FAANG-Ville Following Tuesday’s Late Selloff?

What was that all about? Yesterday’s late pullback, that is.

As veteran technical traders will tell you, sometimes a violent reversal of the trend will flush out the “weak hands” and then return immediately to the trend. But if we’ve learned one thing in 2020, it’s that volatility can manifest itself at any time. In this market it seems there’s always enough uncertainty to rain out any ball game—even when it looks like blue sky above.

Considering the major indices snapped back in the overnight hours, was yesterday afternoon one of those occasional “flushes?” Or, was it a reminder that this market has gotten ahead of itself? Here’s what we know.

When the sluggers strike out, it’s hard to rack up much offence.

Investors got reminded of that Tuesday after theS&P 500 failed in its attempt at new all-time highs and descended abruptly to post sharp losses. The FAANGs, including Apple (NASDAQ:AAPL), all fell 1% or more, with Apple off 3%. As noted here yesterday, these stocks exert a huge weight on the major indices. They’ve helped carry the market higher for months, and on Tuesday they helped push it down as the SPX fell for the first time in eight sessions.

When you see what we appear to be having now—a pullback in Tech and a rotation into value—it becomes difficult to keep momentum. With all the FAANGs having a rough day at the plate, it gets even harder. Some of the late pressure yesterday might have stemmed from reports of more static between negotiators in Washington trying to hash out a new stimulus, as well as trepidation ahead of the Democratic vice presidential announcement that investors had been told was looming.

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In normal times, Financials (the second-largest SPX sector) might be able to pick up some of the slack. And, in general, banks performed pretty well Tuesday when you look at both the biggest ones on Wall Street and the regionals. Financials might get more tailwind today with Treasuries falling again.

Still, banks face a giant headwind trying to make money with rates so low historically, and can’t necessarily be counted on to come out and have a great day every session. Until they get into a better position, it could be challenging to make a long run and get firmly above those old intraday highs above 3390 for the SPX.

To put it in context, though, “old” isn’t really the best word for a time less than six months ago. The market looks like it’s following the example of its 2009 comeback when it rallied 50% from its March lows by August, an analyst noted on CNBC.

As we near the all-time highs, the “fear factor” might come in, too, with some people maybe wondering if the market has come too far. Technical factors might also be at work. As of Tuesday, the SPX was trading around 10% above its 200-day moving average. This is about where some past rallies have run into selling pressure.

There was also a big swing Tuesday out of the stocks and other investments with the strongest recent performance. Besides Apple, these included gold and Treasuries. All this could reflect a one-session change in the wind or maybe something a little more dramatic. The NASDAQ Composite, where so many big tech stocks live, has declined three days in a row and appears to be scuffling a bit after leading the rally earlier this summer.

Once again Tuesday, the small-cap Russell 2000 Index (RUT) had the best day of any major index, perhaps reflecting more people jumping onto the value train. The small-cap rally isn’t happening in a vacuum. Results for RUT firms in Q2 have been better than analysts had expected, Barron’s reported. Also, the Wall Street consensus estimate for the RUT’s combined 2020 earnings per share is up 35% since the start of Q2 earnings season. Large-cap estimates have climbed, too, but only about 4% in the same period.

Reopening trade dominated early this week before the market wobbled into Tuesday’s close. Optimism about progress with vaccines and falling caseloads could help explain why some investors are getting out of risk-off trades like gold and Treasuries. However, they appear to be piling into “value” areas, which doesn’t necessarily help the big indices. If this pattern continues, it could be tough for the huge rally to continue even if the new pattern reflects more strength in the broader economy.

Speaking of which, some analysts said hopes for strong data might account for the big sell-off in Treasuries yesterday that sent the 10-year yield up to an intraday peak of 0.66%. That’s the highest level in nearly a month. Gold tumbled a massive 5.5% Tuesday, ending way below $2,000 an ounce. The yield curve-steepening seen Tuesday likely helped the Financial sector. “Risk-off” seems to be the early word Wednesday as Treasuries and gold come back under pressure.

One day is one day, not a trend. Still, you can’t help but wonder if there’s some sort of pattern change when you see so many people getting out of the trades that dominated the scene over the last month or two.

It’s probably been the strangest summer of most of our lives. That doesn’t mean people aren’t taking summer vacations (in some sense of the word) before kids go back to school (in some sense of the word). All of which could help explain the low volume seen recently, not atypical during the “dog days” of August. With volume low, you sometimes see sharp moves like the one late Tuesday. With that in mind, anyone jumping into or out of the market might want to be especially careful the next few days.

Straight ahead this afternoon investors are expected to see earnings reports from Cisco (NASDAQ:CSCO) and LYFT (NASDAQ:LYFT), followed tomorrow morning by weekly initial jobless claims. Analysts expect claims to be in the neighborhood of 1.15 million, down from around 1.19 million the prior week, according to research firm Briefing.com.

Also, if you haven’t looked at the CBOE Volatility Index lately, you might want to take a gander. It was below 23 this morning, nearing the post-pandemic lows seen earlier this week. Another place people might want to check is the July consumer price index. Both core and headline figures were on the high side at 0.6%, well above analysts’ estimates.

Looking back at last month, it appears investors continued to see opportunity— especially in tech-related stocks—as the Nasdaq helped lead the way higher for markets overall. The Investor Movement Index ® (IMX?) increased to 4.63 in July, up 1.76% from its June score of 4.55. Based on historic averages, the July reading looked moderately low. It hit multi-year lows earlier this year before rebounding.

The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets. As a backdrop, we continued to have the headline risk of COVID-19 and its implications— both good and bad—for many sectors, particularly Health Care and retail. Earnings season helped add another element to trade during the month, and, in many cases, increased individual stock volatility.

TD Ameritrade (NASDAQ:AMTD) clients were net buyers once again last month, the data showed, focusing most of their energy largely on the Information Technology and Health Care sectors. Some of the popular names that clients bought during the period included Tesla (NASDAQ:TSLA), Pfizer (NYSE:PFE), Apple and Microsoft (NASDAQ:MSFT). Stocks they sold included Roku (NASDAQ:ROKU), Facebook Ic (NASDAQ:FB), Costco (NASDAQ:COST)(COST), and FedEx (NYSE:FDX).

Hard Times Could Slow Retail Sales: Data have generally been trending better over the last month. Still, the government says more than 50% of U.S. households have had someone become unemployed over the last five months. More than a quarter of households reported that they either missed last month’s mortgage or rent payment or have no confidence they can make their next one on time.