MorningWord 2/24/17: Damage Report

by Dan February 24, 2017 9:28 am • FREE ACCESS

In a market that has no fear, with volatility unusually low, it’s usually a good time to look the other way and check for chinks in the armor.

Yesterday saw the total collapse of 2016’s best performing stock in the S&P 500, with shares of Nvidia (NVDA) (which was up more than 200% last year), closing down 9.27% on the session. That marks a 20% sell-off from its recent all time highs, down 20% in the last 3 weeks. As I write the stock is down 4% in the pre-market, breaking below significant near term technical support at $100. To my eye the next stop will be down near $87 which is the intersection of mid December V reversal (that launched the stock to new all time highs) and the uptrend that has been firmly in place since the mid May earnings gap when the stock traded with a 3 handle:

NVDA 1yr chart from Bloomberg

What can be extrapolated here is that NVDA has been an incredibly crowded trade. It has unusually positive sentiment surrounding its move into emerging technologies. But those have yet to make up a substantial part of the company’s sales. The result was an unusually hefty valuation.

Steel stocks took on the chin yesterday, with U.S. Steel (X) down nearly 8% on the session, even while its CEO was in the White House with the President, talking about infrastructure spending and protectionist policies. As of yesterday morning X was up 100% since the election.  Was yesterday’s price action a sign that investors are starting to doubt that the President’s agenda actually comes through in 2017?  The stock has also followed through on the downside this morning, down $1 as I write. To my eye, $30 is a must hold:

X 1yr chart from Bloomberg

While much of our markets focus has come from the potential and subsequent change in political regime over the last year in the U.K &  U.S., the next few months will also get a dose of Frexit, as we get closer the French Presidential elections on April 23rd. Marine Le Pen, the leader of the right-wing National Front Party is gaining some traction and pointing to the populist movement that brought our President into office as a model for what should happen in France. If that does happen it could very likely lead to the dissolution of the EU. Keep an eye on the Euro Bank Stocks Index (SX7E), which is down 12% from its 52 week highs made last month, and today breaking below the uptrend that had been in place from the post Brexit lows:

SX7E !yr chart from Bloomberg

Obviously, all, some or none of these indicators may mean anything in hindsight. But with the market at its highs, and vol historically low, it makes sense to take an assessment of current damage within the market just in case it spreads.