On Tuesday, investors with exposure to technology and other high-flying companies might see whether the wider market can bear the selling pressure and whether they would have to experience prolonged periods of choppiness.
The VIX surpassed 20, indicating a potential tipping point for increased volatility. It closed below that level, at 19.48, up 6.4 percent for the day. A rising VIX, a measure of investor fear derived from S&P500 option prices, is typically accompanied by a falling stock market.
“There is some significant underperformance in technology this week compared to the broader market. It demonstrates a significant crack in the uptrend,” said Katie Stockton, founder of Fairlead Strategies.
“The sharp knee jerk of [Tuesday’s] decline demonstrates how things were really pent-up,” she explained. “It indicates that market sentiment has become too complacent.”
Stockton stated that the afternoon reversal a little higher did not resolve anything and that the test could go on. “When you get reversals, it sometimes indicates a selling climax. but it wasn’t strong enough to imply that,” she explained.
According to Stockton, the Nasdaq 100 made a significant break below its short-term support level of 13,717. At 13,544, it was down 1.9 percent.
Looking at Alphabet, one of the Big Tech growth favorites, Stockton predicted a few more weeks of choppy trading. Alphabet ended the day at $2,306, down 1.6 percent.
“With today’s gap down, it leaves an island reversal on the chart for Alphabet in particular,” she explained. “It’s just a temporary arrangement. It does allow for another two to three weeks of decline.”
According to Frank Cappelleri, executive director at Instinet, the market was ripe for selling, which hit the riskiest companies hard. The Ark Innovation ETF ARKK fell 3.6 percent and has been declining since April 26.
According to analysts data, Ark’s flagship exchange-traded fund temporarily fell below its 200-day moving average level of $112.71 for the first time in more than a year. At $113.29, it managed to close above that level.
“It was able to hold the 200-day moving average, which a lot of traders are watching,” Cappelleri said. “I believe it was critical to see that hold for the first time. The problem with ARKK and others is that the rallies from support levels have faded, and we don’t know if that will happen again. That is the most serious concern.”
The 200-day moving average is a momentum indicator that could indicate a downward trend if the ETF trades below it.
In addition, the Solar Invesco ETF fell below its 200-day moving average of $81.20. The fund lost about 6%, closing at $77.20 per share.
Bitcoin was also significantly lower. According to Coin Metrics, the cryptocurrency was down about 5% in late afternoon trading, trading at around $54,447. According to Stockton, support would be at $42,000, the January high, and the market could move lower to test that level.
Recently, analysts have noticed a stronger correlation between bitcoin and the stock market, particularly the Nasdaq.
“I guess people are looking at this and wondering if it’s a long-overdue hiccup,” Cappelleri said. “The market tends to readjust, or it will be something more significant. Looking at the S&P500, it has gone 31 days without a 1% move.”
The S&P technology sector fell 1.9 percent on Tuesday, but the industrials, financials, energy, and materials sectors all rose. Materials increased by 1%, while financials increased by 0.7%. Industrials were up 0.4 percent, while energy was only marginally higher.
“Even with that, the value sectors keep things together,” Cappelleri said.
Some growth ETFs were down for the sixth day in a row, so the question now is, “When will investors start looking for bargains?” he asked.
Dividend stocks could be the solution to high volatility
In these unpredictable times, investors who want a steady, predictable income source may choose for dividend-paying equities.
Tobacco company Philip Morris has the highest dividend yield on the list, at 5.1 percent. Tobacco companies frequently pay out large dividends, but investors who look for ESG (environmental, social, and corporate governance) factors avoid them.
The Food and Drug Administration has proposed a ban on menthol-flavored cigarettes, posing a new regulatory challenge for cigarette manufacturers. When the news was first reported last month, Philip Morris stock dropped, but it has since recovered.
Merck, the pharmaceutical company, has the second-highest yield on the list, at 3.4 percent. The company’s stock had a rough year in 2020, plummeting sharply even before the broader market experienced a pandemic sell-off. Merck was trading above $90 per share at the beginning of 2020, but has been trading in the $70s this year.
Power-management company Eaton and McDonald’s are the companies on the list with the highest approval ratings from Wall Street, with buy ratings from 70% and 69% of analysts, respectively. This year, the stocks have performed well, with McDonald’s rising more than 9% and Eaton outperforming the market by 20%.
McDonald’s reported its first-quarter results at the end of April, and several Wall Street analysts praised the company. KeyBanc increased its price target for the stock to $265 per share, citing the company’s strength in the United States and abroad.
“Same-store sales trends in the United States continue to be strong, and McDonald’s remains a category leader in the majority of its international markets, where it will likely benefit from strong pent-up demand.” Despite a 13 percent increase in the stock over the last three months (compared to a +11 percent increase in the S&P500), MCD has underperformed its fast food rivals and remains attractive on a relative basis, according to KeyBanc in an April 29 note.