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The stock market shakeout is likely not over but, even with Friday’s comeback

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A pedestrian beyond your New York Stock Exchange in New York, Come july 1st 29, 2020.

Wang Ying | Xinhua News Organization | Getty Images

The technology wreck is probably not over, despite Friday’s market comeback. 

Analysts anticipate the shakeout in stocks and options to continue after the long Job Day weekend, especially in technologies names and the Nasdaq, aspects of the market that notched the sharpest gains.

After August’s 7% gain in the S&P 500, stocks started September strong, and then just as quickly rolled over. The Nasdaq lost 5% Thursday and was down sharply Friday but pared losses to decline 1.5%. The S&P 500 was down about 2.3% for the week, even following a 3.5% loss Thursday.

“I think this is a good wake-up call and a reminder that there are risks out there,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. “In August, we did take a little bit off the table.”

Analysts are expectant of the week ahead to be busy, with holidays ending and more market pros back at their desks. There is some economic data, most importantly Friday’s consumer price index. The reading on consumer inflation is expected to show little change in core inflation with forecasts for a gain of just 0.2% in August, or 1.6% year over year. 

Froth blowing off

The stock sell-off came as market pros were becoming increasingly cautious with froth in the market, particularly in tech and momentum names. On Friday, it was revealed that SoftBank was behind billions in large options bets on individual tech stocks, like Amazon, Microsoft, Apple and Tesla. News reports said the trades were made over the past month, and SoftBank had been building unusually large positions in call options, or those that bet the prices of underlying stocks would rise. 

One analyst said the fact that SoftBank was “gunning the market” makes him worry that there is more trying to sell to come in Nasdaq names. As SoftBank bought call options, the sellers had to buy stocks, conceivably driving up prices in a trading feedback loop.

“It’s just a trip to the casino,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “If they’re supposed to be an investment company taking a long-term horizon, then trying to juice your short-term return through options, you’ve turned into a hedge fund.”

JPMorgan strategists said they expect the market to recover gradually, but you can still find presidential election uncertainties looming in the next couple of months.

“The significant reduction in previously extreme long positions in Nasdaq by momentum traders should enable the equity market to recover over the coming weeks, as happened after the June 11th correction,” noted JPMorgan analysts. “But a repeat of the strong gains seen during July and August is less likely over the next two months.”

Grohowski said there could be more trying to sell in the tech and internet companies, or those who were viewed did nicely as workers stayed house and the economy was arrêt. “It’s not the start of a large lasting correction, but a good forewarning the next couple of weeks plus months are going to be choppy. I believe it’s going to be a sideways sort of market,” Grohowski mentioned. He added the market could be choppy in the few days ahead.

 “We’re a bit more cautious, not to mention this market is trading in 23 times our cash flow estimates for 2021,” said Grohowski. This individual said the fact there is about $4.5 trillion in money market money is a bullish signm since that money may find its way into the stock market.

Julian Emanuel, head of equities plus derivatives strategy at BTIG, said the S&S 500 could dip to be able to its 200-day moving normal, or 3,092, ahead of rebounding, which would be with regards to a 15% move in total. 

“I don’t think the sell-off is over. Nasdaq is up 83%s since 03 23, the S&S is up 63%,” said Emanuel.

Week ahead of time calendar

Monday 

Labor Day

Tuesday

6:00 a good.m. NFIB

10:00 a.m. QFR

3:00 p.m. Consumer credit 

Wednesday 

10:00 a.m. JOLTS 

Thursday 

8:30 a.m. Unemployed claims

8:30 a.michael. PPI

10:00 a.michael. Wholesale trade

Friday 

8:30 a.m. CPI

10:00 a.m. QSS

2:00 p.m. Federal budget

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