Morning Notes — Technical Support

Thus far, the current sell-off in software stocks looks like episodes from the past two years (2018 and 2019), which also happened to occur in August/September.  This current episode is likely to look similar to the past two, rather than a full-fledged correction where multiples are cut in half.  Multiples are stretched and positioning is over-crowded, but there’s no fundamental weakness in recent results from software companies. The catalyst for the sell-off was bad guidance from network equipment provider CIEN.  As discussed on Wednesday, rising vaccine optimism may also be a headwind for perceived ‘COVID winners’ as incremental investment dollars begin to shop low multiple beneficiaries of ‘return to normal.’  If the current pull-back in software builds into something more severe, investors should avoid high multiple SMID-cap companies with negative operating margins.  

The Nasdaq Composite (CCMP) broke initial trend line/upside gap support yesterday when it closed below 11,700.  At 11,225, the CCMP is currently trading above more significant technical support defined by its prior break-out at ~11,130 and would still be ok down to its 50-day moving average of ~10,900.  At ~3410, the S&P 500 is currently resting right at initial technical support with more significant levels in the 3210-3280 pattern break out range.  Levels below technical support would change our mind about the severity of the current pull-back.  We’re also keeping a close eye on bond yields with 30-year levels above ~1.60% as a potential trigger for more meaningful sector rotation.  The first thought should be that both indices hold support and bond yields stay range bound, which argues for a near term bounce in the SPX and CCMP before possibly testing these same levels again in October (pre-election).