What caused it?
Was it news that France and Germany could be moving to another long-drawn lockdown due to COVID-19 or was it because the three of the most powerful CEOs in the tech industry were grilled by the Senate yesterday with the future of their business model under question? I think it was a bit of both. To top it up we had the breakdown in some technical areas that we have been alluding to for some time. Since Oct 12 the markets are down 8 %. From yesterday’s senate hearings it is more likely two of the top five S&P constituents (Google and Facebook) run the risk of being more regulated. The market might consider how these companies have to be valued if the liability shield of section 230 were to be taken away.
Now if you don’t know what is section 230, you may want to google up. Section 230 of the communication Decency Act which was passed in 1996, says an “interactive computer service” can’t be treated as the publisher or speaker of third-party content. That protection is being reviewed now. This is also happening at a critical time. In 1999 the sector composition within the S&P 500 was 37 % for technology. It is now at 40 %.
From the Senate hearing, it is very clear that these platforms are too big to manage and can create unintended consequences that are dangerous to society. The leaders of these companies don’t know how to tame the monsters that they’ve created. Zuckerberg of Facebook admits that he is dealing with a Frankenstein but Dorsey of Twitter denies it.
Equities
We have been putting a lot of emphasis on the S&P 500 for the level at 3361 and the Dow at 27,775. Our view was that a break of those levels should confirm any upside pressure in the markets should be contained. Both the major indexes have declined below levels that strongly support the bearish case. Currently, the Dow is down over 7 % for the year while the Nasdaq is up over 22 %. We want to draw some parallels to early 2000. While the Dow topped in January the Nasdaq continued to rise till March 2000. The bear market that followed quickly erased the discrepancy and led to a 78 % decline in the Nasdaq over the following 2.5 years.
In the S&P 500, it was the second day in a row of 90% downside day. Downside breadth on the NYSE was negative by over 10 to 1. The VIX closed at its highest level in four months. The S&P markets should target and test the lows of Sep 24 at 3209. A break of that should open its way to 3055. Meanwhile, snap back rallies should be expected.
Bonds
Prices in bonds carried up to 174^29. If it is a counter-trend rally, as we expected it should top out soon. A break below 172^25 should give us more confidence for a larger move down.
Euro
Euro continues to trade sideways but should stay above 1.1610 and try to resolve higher challenging the 1.2010 high in Sep.
Gold
Gold is breaking lower and an attempt to challenge the 1849 low of Sep 24 is underway. Currently, it is trading very technically. A move below 1849 will open up the bearish case for much bigger falls.
Author: ©Abraham George, CEO, Founder of AllSeasonsPTL Capital Management Ltd.
