"The economy is not sending any signals that we need to be in a hurry to lower rates." These words from Chairman Powell impacted the stock market much more than this week's inflation data.
The stock market started selling off on Thursday afternoon and continued to do so Friday, with the broader stock market indexes closing lower. The Dow Jones Industrial Average ($INDU) closed down by 0.70%, the S&P 500 lower by 1.32%, and the Nasdaq Composite ($COMPQ) lower by 2.2%.
It's also options expiration Friday, which generally means increased volatility. The Cboe Volatility Index ($VIX) gained 12.79% on Friday, closing at 16.14. That's a big jump from earlier in the week.
The Nasdaq experienced the biggest drop of the three indexes. The chip makers got smoked. Applied Materials (AMAT), the largest US chipmaker, was down 8.76% on a disappointing revenue forecast. Nvidia (NVDA) was down over 3%, Micron Technology (MU) was down almost 3%, and Intel (INTC) fell 1.70%.
The daily chart of the VanEck Vectors Semiconductor ETF (SMH) gives a clear picture of the semiconductor industry.
Although SMH is still within the sideways range (grey rectangle), it's very close to the bottom of the range, which aligns with the 200-day simple moving average (SMA). The StockCharts Technical Rank (SCTR) score is at a low 29, the moving average convergence/divergence (MACD) indicates a lack of momentum, and SMH is not outperforming the S&P 500 like it once did.
Looks like investors are rotating away from semiconductors, either taking profits or investing in other asset classes -- but which ones? It's certainly not healthcare stocks, which also got pounded on Friday. Perhaps cryptocurrencies. However, there's more brewing beneath the surface.
The economy is still strong—retail sales data shows that consumers continue to spend, which is pushing Treasury yields higher. The 10-year US Treasury Yield Index ($TNX) closed at 4.43% (see daily chart below). TNX has been trending higher since mid-September and since the end of September has been trading above its 20-day SMA.
Fed Chairman Powell and Boston Fed President Susan Collins' comments lowered the probability of a 25-basis-point interest rate cut in the December FOMC meeting. According to the CME FedWatch Tool, the probability is now 58.2%. It was close to 70% on Thursday, before Powell's speech.
The relentless yield rally may have been one reason the Tech sector sold off. Higher yields don't benefit growth stocks.
One asset class that is gaining ground is the US dollar. When the words "Dollar sets 52-week high" appear in my predefined alerts dashboard panel, it's something to analyze. The US dollar ($USD) has been in a relatively steep rally since October (see chart below). With a strong US economy and the Fed indicating a more neutral stance in their policy decisions, the dollar could continue to strengthen.
With the exception of the Dow, the other broader indexes have fallen to the lows of November 6, the day after the US presidential election. The broad-based selloff could continue into early next week. There's not much economic data for next week, but Nvidia will announce earnings after the close on Wednesday. That should shake up the chip stocks.
If you have cash on the sidelines, there could be some "buy the dip" opportunities. However, because there are some dynamics between stocks, yields, and the US dollar, the three charts should be monitored to identify signs of a reversal. When you're confident of a reversal, jump on board.
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Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.