The Spasm of the NASDAQ

Volatility emerged from the NASDAQ as one month’s worth of gains was wiped out in less than five hours on Friday. The breakdown emanated from its largest components which have largely been responsible for its YTD gains. Many of the same names have driven both the NASDAQ and the S&P 500 higher for 2017: Apple, Facebook, Amazon, Google, Microsoft, Netflix and Tesla among others. When the leaders of a market start to reverse, a broader correction typically ensues.

The “breadth” or number of stocks responsible for 2017’s returns have been narrow. For example, 40%+ of the gains in the S&P 500 have been driven by five stocks (Apple, Amazon, Google, Facebook and Microsoft). This “low breadth” is considered a warning sign that under the hood of the market is not so healthy. Sometimes, a sharp pullback snaps it all back into sync where a move higher can ensue afterwards with greater breadth. The markets have shown complacency with volatility at all-time lows and traders buying call options like there is no tomorrow so a sharp correction shouldn’t be a surprise.

The DOW and Russell 2000 (small caps) didn’t take a hit like the NASDAQ so next week will be very important to determine if Friday was a one-day wonder or the start of a larger multi-week correction. See more in the Chart Time! section.

If we do move to a larger correction, technical analysts project that we could shave off up to 1,000 points on the DOW or 100 S&P points before we bottom. A move higher early Monday may be just a short-term bounce so keep your risk management hat handy.

Economic & Central Banking Snippets

  • Japan’s GDP grew markedly less than originally thought in Q1 at a rate of 1% verses an initial estimate of 2.2%.
  • The European Central Bank (ECB) has tweaked its much-watched forward guidance, ruling out a promise to cut interest rates “lower” if needed. Making its latest policy decision, the ECB omitted a reference to lowering its already record rates, adding they would remain at “their present levels for an extended period of time, and well past the horizon of the net asset purchases”. The ECB will also keep its quantitative easing program running at a pace of €60B a month “or beyond if necessary”.
  • Greek unemployment fell in March to a five-year low of 22.5% – its lowest level since early 2012. Greece’s economy grew by 0.4% in Q1 bucking widespread expectations of a contraction which would have taken it into an official recession.

Unemployment in Greece


  • Iceland suffered its worst quarter of economic growth in three years as GDP fell by 1.9% in Q1. Iceland’s central bank was forced to cut interest rates last month while the government is expected to loosen fiscal policy.
  • Quarterly growth in the eurozone expanded at its fastest pace since 2015 at the start of the year, underscoring the bloc’s impressive economic performance in a year many had feared would be plagued by political risks. A second official estimate from Eurostat was upgraded from 0.5% to 0.6% for Q1, following better than expected performances in France, Italy and Greece. Year on year growth rose to 1.9% from a first estimate of 1.7%.
  • Next week’s reports will be highlighted by the FED meeting, retail sales, and industrial production.

Politics! Politics! Politics!

  • Mexico will swallow a large cut in the volume of refined sugar it can export to the US in exchange for a deal not to impose punitive anti-dumping that producers say would have priced them out of the key market. Such a deal
    looks like a victory for US refiners, who have been pushing for higher volumes of raw sugar from Mexico. The aim of the negotiations had been to avoid tariffs and to maintain Mexico’s position as principal US supplier.
  • Anthem is pulling out of the health-insurance exchange in Ohio next year, leaving a second region of the country poised to have no marketplace options under the Affordable Care Act. According to Anthem, “decisions on ACA have become increasingly difficult due to the shrinking individual market as well as continual changes in federal operations, rules and guidance.”
  • The US House of Representatives has advanced legislation aiming to undo regulations enacted in response to the 2008 financial crisis. Thursday’s vote by the House was 233-186 in favor of the Financial Choice Act, sending the bill to the Senate for that chamber to consider. Among other things, the bill would make major changes to the Consumer Financial Protection Bureau, repeal the Volcker rule and replace Dodd-Frank’s orderly liquidation authority measures for unwinding large, complex institutions with a new form of bankruptcy.
  • The U.K. could suffer another ratings downgrade after a general election led to a hung parliament, according to S&P Global. The country lost its AAA rating last June following its vote to leave the EU. S&P said at the time it was worried the decision would lead to a deterioration of Britain’s economic performance and institutional framework.
  • Puerto Ricans are due to vote this weekend in a referendum on the island’s political status. Three choices will be on the ballot: statehood, “current territorial status” and independence. It’s not certain what would happen if any of the options wins clearly or how Congress would interpret the results, but the referendum, the island’s fifth since 1898, comes amid a crippling economic crisis.
  • New York health insurers requested double-digit increases as high as 47% for ObamaCare policies next year as the debate rages in Washington on how to overhaul the law. The state’s Department of Financial Services will decide on 2018 rates following a 30-day public comment period, but noted that the average proposed increase for individual policies for 2018 is 16.6%.

Chart Time!

The stock market has now gone 2,065 days without a 20% correction. That’s the 3rd longest streak since 1960.

S&P 500 (SPY)
S&P 500 (SPY)


Dow Jones (DIA)




IWM Russell 2000
Russell 2000 – Small Caps (IWM ETF)


10 Year Treasury Yields – TNX


Market Snippets

  • Apple joins the home speaker fray. The company convened its annual developers conference, where a Siri-powered smart speaker named “HomePod” was revealed to compete head-on with Amazon’s Echo and Google’s Home. (FT, BBC)
  • Ignite Restaurant Group — which operates Joe’s Crab Shack and Brick House Tavern + Tap restaurant chains — has filed for bankruptcy after feeling the pinch from declining sales amid a broader slump hitting the casual dining sector. (FT)
  • The number of electric vehicles on the road rocketed to 2 million in 2016 after being virtually non-existent just five years ago, according to the International Energy Agency. Registered plug-in and battery-powered vehicles on roads worldwide rose 60% from the year before, according to the Global EV Outlook 2017 report from the Paris-based IEA. Despite the rapid growth, electric vehicles still represent just 0.2% of total light-duty vehicles. “China was by far the largest electric car market, accounting for more than 40% of the electric cars sold in the world and more than double the amount sold in the United States,” the IEA wrote in the report published Wednesday. “It is undeniable that the current electric car market uptake is largely influenced by the policy environment.” (Bloomberg)
  • Heads roll at Uber as more than 20 employees were fired after an investigation into sexual harassment claims, according to people close to the company, as the ride-sharing app maker tries to draw a line after a series of crises. (FT)
  • The total market cap of all digital currencies (Bitcoin, Ripple, Ethereum, etc) crossed $100B this week.
  • Internet streaming will become the largest source of global recorded music sales this year as revenues from services including Spotify and Apple Music surpass sales of CDs and vinyl records for the first time, according to a new forecast from professional services firm PwC. (FT)
  • The discovery of fossils near Marrakesh pushes the evolution of modern humans back by 100,000 years. These people had “basically the face you could meet on the train in New York”, said one of the scientists reporting the find. (FT, Time)
  • Hudson’s Bay, owner of the Saks Fifth Avenue and Lord & Taylor department store chains, said on Thursday that it planned to cut some 2,000 jobs across its North American operations as part of a major restructuring after posting bigger-than-expected first-quarter losses. The Canadian company said the cuts — were needed to “help offset revenue, margin and cost pressures” that it is facing “as a result of the current environment.”
  • Boeing is looking ahead to a world where jetliners fly without pilots and aims to test some of the technology next year. “The basic building blocks of the technology are clearly available,” said Mike Sinnett, Boeing VP of Product Development. Jetliners can already take off, cruise and land using onboard flight computers and the number of pilots on a standard passenger plane has dropped to two from three over the years. (FT)

International Snippets

  • Banco Popular was the victim of the eurozone’s first large-scale bank run, which triggered the urgent need for regulators to intervene and engineer its rescue this week, a senior official at the European Central Bank has admitted. “The reasons that triggered that decision were related to the liquidity problems,” said Vitor Constancio, vice-president of the European Central Bank said on Thursday. “There was a bank run. It was not a matter of assessing the developments of solvency as such, but the liquidity issue.” The ECB stepped-in on Tuesday to declare that Popular was “failing or likely to fail”, which placed the bank into resolution overseen by the eurozone’s new body for handling failing banks. After European regulators took control of Popular on Tuesday, they wiped out the struggling lender’s shareholders and junior bondholders, and sold it for a symbolic €1 to its bigger rival Banco Santander. The move was prompted by a warning from Popular to Spanish authorities on Tuesday afternoon that its depositors were withdrawing money so quickly that it would not be able to open the next day unless a solution was found, according to two people involved in the deal.
  • Banco Popular’s emergency overnight rescue by Banco Santander forced European Union watchdogs to make a last-minute adjustment to their planned stress tests of the balance sheets of Europe’s biggest lenders. The larger Santander-Popular bank will undergo the stress test as long as the deal is completed by the end of the year — the cut-off point at which the EBA insists balance sheets are tested. Also missing from this year’s list of sample banks is Italian bank Monte dei Paschi, the poorest performer in the 2016 stress tests and now under restructuring. No bank from Greece or Portugal will take part in the 2018 tests due to a requirement of having a minimum threshold for banks of €30B of assets. The EBA’s stress tests have attracted criticism for not being as rigorous as their counterparts in the United States and the United Kingdom. There is no pass or fail — instead banks’ results are meant to simply “inform” discussions with supervisors about the right level of capital.
  • Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping €1.2B of private capital into the two regional banks, Reuters reports. The Italian government plans to lead the rescue but EU competition authorities have requested a private capital injection as a condition to approve the bailout.

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.