Stocks off lows but more losses could be on the way



European stocks and US futures bounced off their lows, but after what has been an ugly week and with the weekend approaching, do not be surprised if we were to see renewed selling later in the afternoon.
 



Sentiment remains cagey owing to concerns about the pace of the economic recovery due to the rapid rise in new virus restrictions and the delay in US stimulus talks, not to mentioned Brexit and US election uncertainties. The US is also dealing with a surge in coronavirus cases, and if the world’s largest economy goes into another lockdown, or some form thereof, then things may get uglier for risk assets. Another risk is the potential for a messy, contested, presidential election outcome, which together with disappointment over a much hoped-for stimulus bill means there is an increased risk we may see heightened volatility.
 
So, in recent days, investors have been forced to reassess their optimistic projections on economic recovery and some growth stocks. But is there more selling to come in light of the above macro concerns and the disappointing reaction to the big US tech earnings last night?
 
 
Big tech earnings disappoint
 
Earnings results from tech giants Apple and Amazon, as well as social media companies Facebook and Twitter, failed to lift their shares in afterhours trading.
 
These stocks look set to gap lower at the open when Wall Street opens for trading, with Twitter set for a 16% plunge after the firm’s user growth disappointed badly as it added just a million new daily users compared to 9 million expected by analysts. Apple’s quarterly sales of the iPhone fell 21% on anticipation of the new models, with revenue dropping 29% in China. Worryingly for investors, Apple provided no forecast for the key holiday quarter, raising uncertainty about the outlook. Meanwhile, Amazon’s results were decent but the fact the company expects its operating income to take a $4 billion hit due to virus-related expenses has unnerved investors. The bright spot in an otherwise poorly received tech earnings from last night is Google’s parent company Alphabet, which looks set to open 6% higher. Digital advertising for Google, the key metric for the company, rebounded 15% to a cool $38 billion in the third quarter.
 
Will tech sector go into correction?
 
As it is the reaction to news that is always more important than the news itself, the fact that shares of the above tech giants dropped in afterhours trading, makes me wonder whether we will now see a bigger correction in the sector, and the major US indices. The fact that some of these tech leaders raised concern about the outlook for the sector will not go unnoticed by forward-looking financial markets. Investors have until now been piling into growth stocks but going forward some will undoubtedly think twice about investing in these markets without first witnessing a sizeable correction. So, there is a possibility that the sector may extend its correction further, as froth is removed from some of technology names which have disproportionately surged higher since lockdown in March.
 
Insofar as the broader S&P 500 index is concerned, well it too faces pressure, both from the above macro concerns as well as bearish technical factors:

SPXSource: ThinkMarkets and TradingView.com

The index has broken its bullish trend line and key support levels such as 3340 and 3300. These levels are likely to turn into resistance, potentially leading to further falls. I wouldn’t be surprised if the index goes on to break the recent low at around 3210 next, and possibly test the 200-day average at 3127 in the coming days.
 
So, as things stand, the path of least resistance is to the downside. But if and when the index manages to reclaim the broken bullish trend then at that point the bearish bias would end, unless we see a distinct key reversal pattern at lower levels first.
 



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