Nasdaq Hits Correction Territory As Big Internet Firms Probed By Regulators

Nasdaq - Another Decline For Stocks

Nasdaq is getting into correction territory. The stock market fell again on Monday, continuing this correction. S&P 500 fell 0.28% after opening up. Nasdaq fell 1.61% because of regulatory issues which I will get to later. Russell 2000 increased 0.31%. 

VIX increased 0.8% to 18.86 as it inched closer to my target of 20. S&P 500 is now down 6.84% since late April. If you assume a 26% decline prices in a recession, then there is now a 26% chance of a recession.

JP Morgan model says there is a 40% chance of a recession. S&P 500 would need to fall a total of 10.4% to price that in. That’s in line with my projection for a 10% correction. This calculation also explains why the 20% decline late last year was ridiculous. 

A recession was almost fully priced in even though there was no evidence of one. 

Nasdaq - Even now, 5.5 months later, there still aren’t many major economic reports showing negative growth. Data looks bad now, but it also looked bad in early 2016 before the economy recovered. The stock market should be down 10% to reflect the risk of a recession, but it shouldn’t be down 26%.

CNN fear and greed index fell 1 point to 23 which is extreme fear. There haven’t been many big down days where volatility explodes in this correction. We need a washout where the market falls 2% or more to finally reach a near term bottom. 

As you can see from the chart below, the NDR crown sentiment poll agrees with the CNN fear and greed index as it shows there is extreme pessimism in the market. I would get bullish on the near term if stocks had a big drawdown. 

Ultimate deciding factor of where stocks go in the next year will be the economic data as it always is.

Big Tech Has A Bad Day

Nasdaq - Tech and communication services sectors were the worst performers on the day. Regulators went after the big internet firms. Those sectors fell 1.76% and 2.76%. This big decline in the internet firms pushed the Nasdaq into correction territory as it is down 10%. 

Outside of those and consumer discretionary, every sector was higher. The biggest winner by far was materials which increased 3.42%.

Alphabet stock fell 6.11% on news that the DOJ will look into Google’s search practices and other businesses. DOJ has contacted 3rd party critics, but it’s not clear if it spoke with the firm. I think Alphabet faces serious antitrust risk. the company is known for pushing up its businesses in its search engine and suppressing the competition. Google has extreme power to push all Alphabet’s businesses and destroy small firms. 

If Google is forced to change its practices, it won’t hurt Google itself. But new products/services will have a more level playing field.

Companies that compete with Google will have a lesser chance of getting squashed.

Facebook stock fell 7.51% as it is being investigate by the FTC for stifling competition. Facebook is also under pressure for how it handles speech on its platform as it has the power to ban users. If Facebook bans a user, they can’t participate in the new public square where issues are discussed. 

Any time Facebook takes an action against someone, one side of the political spectrum gets mad. It’s a lose-lose situation because Facebook also gets flack for not banning users.

Amazon is being investigated by the FTC for its control of the online retail sector and its growing influence in multiple markets. Its stock fell 4.64% on this news. Amazon has its tentacles in video game streaming with Twitch and the cloud with AWS. 

AMZN is also being investigated by the European Union which is known to be tougher on these firms. These are all American firms, so the EU gains less if they are successful.

Apple WWDC

Nasdaq - Apple stock fell 1.01% in sympathy with these firms, but the company had positive news from its world wide developer conference where it unveiled some new products. Two key trends I noticed from this conference are iPad is being pushed closer to being a laptop. And Apple Watch is being pushed closer to being like a smartphone. 

Apple unveiled iPad OS. Using this operating system, the iPad will have better multitasking capabilities and Safari will automatically present desktop versions of websites. The App Store is coming to the Apple Watch. Users will be able to download apps directly from the device.

Nasdaq - Rate Cuts Are Coming Very Soon

Nasdaq - The biggest quote on Monday was the obvious. St. Louis Fed president, James Bullard, stated “a rate cut may be needed soon.” I say this is the obvious because the market already shows there is an 87.9% chance of at least one cut by September. If the Fed doesn’t guide for cuts at its June meeting there will be a decline in stocks of at least 5%. 

There is now a 24.2% chance of a cut at the June meeting. The stock market will only rally after the June meeting if the Fed cuts rates or if it guides for 2 cuts later this year. Those cuts are most likely to be in September and December. There is now an 80.9% chance the Fed cuts twice this year.

At one point, the 10 year yield hit 2.06% on Monday, but it has since rebounded to 2.10%. I recently called for a near term bounce in this yield as the market has gone overboard. The 10 year yield is acting like a recession is coming as it is far below the Fed funds rate. 

However, a recession is far from a guarantee. The 2 year yield bottomed at 1.81% and is now at 1.87%. The decline in rates on Monday morning fully priced in 2 cuts this year. The current difference between the 10 year yield and the 2 year yield is 23 basis points as that part of the curve steepened recently. 

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