Summary:

• Yesterday saw US indices end sharply lower after beginning in the green
• FAANG stocks led the losers with heavy losses for big tech 
• US500 back at 200 day SMA

 Yesterday morning saw some steady gains for us stock futures with the US500 rising steadily to trade at its highest level of the week just below 2690 before the Wall Street open. Once the US cash session began though it was a different story with wave after wave of selling hitting the market as it fell over 70 points before making a low of 2616. The market bounced a little into the cash close – where it traded 2633 – and has since been largely range-bound. 

 

 The US500 fell sharply following yesterday’s US open, dropping more than 70 points. Source: xStation

The reason for the sell-off is not entirely clear, with some believing that the 10-year yield (shown by the TNOTE on xStation) hitting 3% spooked markets, but this alone is unlikely to have had too big an impact. The TNOTE has been declining for some time now (indicating a higher yield) and whilst it broke its lows yesterday, the move wasn’t dramatic. 

Looking at sectors more closely it was apparent that FAANG shares (Facebook, Apple, Amazon, Netflix and Google) bore the brunt of the selling, with large declines seen. Given that these are some of the largest components of the US500, their weakness was no doubt a sizable contributory factor in the broader index declines.  

 The market has fallen back to retest the 200 day SMA – the 3rd time in recent months this has happened. Source: xStation

The US500 fell back close to its 200 day SMA and the market continues to wrestle with this indicator. The 200 day SMA is seen by some as a key trend identification tool – if the market is above it then it denotes an uptrend; if it is below it suggests a downtrend – and recent months have seen price threaten to break below it on a couple of occasions. The last two times this has occurred the bulls have managed to defend it, although it was looking worrisome for them at one point last month, and once more price is back to retest.

The failure to hold firmly above the 200 day SMA indicates that price hasn’t been making steady gains and has been more range-bound in recent months. If we look back to the end of 2016 when the market set off on its strong rally following the US election we can see that price was consistently well above the 200 SMA, but the recent touches suggest that the momentum may be on the wane.  

Price has been well above the 200 SMA for most the time since the US election. A clean break below here could be seen to signal an end to the uptrend. Source: xStation