Stock investors focused on new worries about the coronavirus and economy, selling into a market Monday that was already technically shaken and set for further declines.
But Monday's sharp sell-off was different than the September slump that has centered on tech and growth stocks. Instead it was led by the cyclical names that had been gaining on expectations for a recovering economy, and not so much by the frothy growthnames that have been correcting.
"Things had to have changed for investors to be so nervous," said Sam Stovall, chief market strategist at CFRA. "With Europe starting to see a sharp increase in Covid cases, does that mean they 're going to reimpose shutdowns?" The U.K. government's top scientists warned the country could expect to see almost 50,000 new coronavirus cases per day in mid-October if no action is taken.
Another factor is the political uncertainty following the death of Supreme Court Justice Ruth Bader Ginsburg, with Republicans moving to replace her immediately and Democrats pushing for a delay until after the inauguration in January. That has intensified an already contentious divide, increases election uncertainties, and makes it less likely Congress will be working together on a stimulus package to support the economy, analysts said.
"Because the recovery from the earlier Sept. 8 low was so anemic, it was an indication that the market needed to go through more backing and filling before it's ready to advance," said Stovall.
Technical analysts say the market has seen a breakdown that could take the S&P 500 to its 200-day moving average at 3,104 or even lower.
Scott Redler, a technical strategist and partner with T3Live.com, said the S&P could test the psychological level of 3,200. "I would say there's a high probability we at least test 3,200 if not the 200-day," said Redler.
The S&P 500 was already down more than 7% from its early September high as of the closing bell Friday . The 200-day moving average is is a technical indicator broadly watched by many investors, not just technical analysts. It literally is the average closing price of a stock or index over the past 200 days and is looked at as a momentum indicator. It often acts as support in a declining market, but if it is broken, it could be a sign of more selling.
After a sharp sell-off during the trading day, the major indexes recovered much of their losses into the close, with the Dow off 1.8%. The S&P 500 was down 1.2% at 3,281, and tech-heavy Nasdaq, which had been leading the selling previously, was off just 0.1%. The Nasdaq was helped by a recovery in Apple and Amazon.
Apple, already in a 20% bear market decline, found its footing Monday and was slightly higher, as was Tesla. Strategists had expected tech to be a battleground in the market this week, with dip buyers looking for opportunities to buy the market favorites.
"I think Apple gave a little bit of confidence for tech to have some dip buying. It helped lift the overall indices off the lows. Does that give us confidence that we've seen the low of the week or next week? No, it was just a trade," said Redler, adding Apple was 22% off its highs. "If it continues, maybe it's better for the overall market, but for now it's hard to have a lot of confidence."
As for major sectors, materials were the hardest hit, followed by energy and industrials, all more than 3% lower. They were followed by financials, off about 2.5%. Airlines were down 7%. Tech turned positive, and was up 0.7% in the final hour, after being down most of the day. Communications services, including Alphabet and Facebook, was down 1.2%.
"I think some of it is that [cyclicals] had a good month. I think you have the algorithms that say to buy the stay-at-home names after the drubbing that went on in Europe, with the possibility of the U.K. crackdown again, and what that means for growth," said Peter Boockvar, chief investment strategist at Bleakley Advisory Group. "To me, this is an allocation shift. Let's go back to buying Zoom, Walmart and Peloton and selling anything that's leisure or travel-related. The sell-off in tech that started in early September started a very different tenor in the market. We were on a much more vulnerable footing going into today."
Redler said the S&P 500 chart also appears to be forming a head and shoulders chart pattern, a negative sign for stocks."That would give us a measured move down to 3,136," he said.
He said the market has been warning a bigger sell-off was in store."There are four or five things that are nipping at the heels of the market," he said. "In the last two weeks there have been many signals that this kind of action could happen and overall, it could be healthy," he said.
Redler said a move from the Sept. 2 high of 3,588 back to the 3,140 area would not be surprising since it started the rally in March at 2,190. "It's a way for people to buy the dip without thinking they're chasing it," he said.
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Stovall said the market is in a seasonally negative time, with September the worst month of the year on average. The end of the month and quarter end is also approaching, though some analyst say that may be good for stocks as big investors rebalance stock and bond holdings.
"October tends to be a capitulation month," said Stovall.
Fundstrat technical analyst Rob Sluymer said he expects as bottom to be formed by October, and the market could see a move higher into the election. He said there are signs that tech stocks are ready for a bounce for a period, but then they and the market could continue to be choppy.
"A lot of the short-term indicators are starting to get oversold. Certainly names like Amazon and Apple, and a lot of the tech names are reaching short-term oversold levels," he said. "I think you're going to have this ebb and flow between technology and cyclicals into October."
Stovall said he still expects a shakeout in growth names which are still highly valued relative to value. The majority of the name in the tech sector are growth.
"The 12-month return for S&P 500 growth minus the 12-month return for S&P value at the end of August was at an all-time high of 35 percentage points," he said. As of Friday, that number was 29.6, lower but the highest since during the tech bubble in 2000. Stovall said he expects valuations to come more in line.
Paul LaRosa, chief market technician at Maxim Group, said he expects the S&P could go to 3,100, and Nasdaq could slide under 10,000, if it breaks support at 10,639. He said the Dow should see support at 27,450 but could see downside to 26,000.
"We don't see it as a market correction. You could see it more as a rotation than a broader market 'everything's going down' correction," he said. He noted that Apple is in a correction.
"I think Apple is in that small universe of companies that have just outperformed…We see it as a potential shift out of those namesinto some that haven't participated," he said.
