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S&P 500 Breaks Lower as VIX Soars: Will Tesla and Apple Overshadow GameStop?

S&P 500 Breaks Lower as VIX Soars: Will Tesla and Apple Overshadow GameStop?

John Kicklighter, Chief Strategist

S&P 500, VIX, Tesla and EURUSD Talking Points:

  • GameStop and other names on the Reddit activist lists extended their surge another day, but not all is sanguine in the ‘risk’ backdrop
  • The S&P 500 and other major US indices broke down through Wednesday with the VIX charging more than 60 percent higher – the third biggest jump on record
  • Meanwhile, the Dollar jumped likely on safe haven appeal rather than FOMC news with EURUSD still grappling with its head-and-shoulders

Amid the Frenzy, Benchmark Risk Measures Falter

The peak of speculative appetite championed by social avengers driving the most heavily shorted companies’ shares (like GameStop) sharply higher is conflicting with a stumble in the typical baseline of speculative appetite. This past session, the major US indices suffered a very noticeable drop to put stretched technical pictures at risk of harsh critique of reversal among the most skeptical market participants in the open markets. While the Dow (-2.1 percent) and Nasdaq 100 (-2.8 percent) were suffering heavy losses of their own, the most threatening picture from the charts in my book was the S&P 500’s drop through 3,800. This looks like a bearish break of an aggressive, rising wedge over the past three months. Of course, a break is not a trend. An immediate turn – whether on FOMC follow through or disappointing 4Q US GDP stats Thursday – would be remarkable; but more crucial in our current situation is the disconnect in speculative reach for the retail favorites against the uncertainty presented by the more enduring risk measures tilt lower.

Chart of S&P 500 with 1-Day Rate of Change and 20-Day ATR (Daily)

S&P 500 Breaks Lower as VIX Soars: Will Tesla and Apple Overshadow GameStop?

Chart Created on Tradingview Platform

Speaking of familiar measures of risk, arguably from the most recognizable read among traders who have been trading for more than a few weeks, the VIX put in for an incredible run Wednesday. On a purely notional basis, the index charged over 60 percent higher this past session – the third biggest advance from the ‘fear index’ in its record. On a technical basis, this severe move stood out as a decisive break of a consolidation in activity since the peak of the pandemic selloff. I don’t usually throw technicals on ‘indicators’ but the VIX has become a trading vehicle in its own right – overriding its hedging role and sometimes leading the S&P 500 (from which it is derived). It is possible that this is just a pressure relief move like June or September that levels out quickly. Yet, given our heights and the backdrop of market conditions, those that simply assume this are taking considerable risk themselves.

Chart of VIX Volatility Index Overlaid with S&P 500 (Daily)

S&P 500 Breaks Lower as VIX Soars: Will Tesla and Apple Overshadow GameStop?

Chart Created on Tradingview Platform

The Axis of Power – Or At Least Financial Headlines – Has Shifted

Though the S&P 500 and peers (not just Dow but alternative risk assets like emerging markets and carry trade) took a hit this past session, the favorite talking point among market participants continued to fuel enthusiasm. GameStop and other heavily shorted stocks extended their rallies through the exchange hours Wednesday to add incredible gains to their already breathtaking moves this past week. GameStop has been the guiding light for those in WallStreetBets and other social circles and its additional 130-plus percent surge seemed to reassure the extreme risk takers. Yet, that wasn’t even the most exceptional drive. AMC, the troubled theater group, gained approximately 300 percent on the day on 1.25 billion shares turnover. Can this crowd keep this group of attacked stocks pointing higher? More importantly, can the performance of this small group keep general sentiment buoyant? I’m skeptical. After it was reported that WSB was temporarily taken down and then made private, an afterhours swoon set in.

Chart of GameStop Shares and After Hours (Daily)

S&P 500 Breaks Lower as VIX Soars: Will Tesla and Apple Overshadow GameStop?

Chart Created on Tradingview Platform

Shifting focus from the heavily contested by niche segment of US shares to the market cap (and pandemic) kings, we are heading into a Thursday trading session that seems to present an explicit risk of the tech leaders. After hours this past session, we were delivered the past quarter’s results for Apple, Tesla and Facebook. Apple beat expectations with $1.68 EPS (earnings per share) against $1.42 expected while Facebook reported $3.88 against $3.22 expected. Nevertheless, both slipped in afterhours trade -3.2 and -1.9 percent respectively. Yet, most remarkable was the -5 percent drop from Tesla on a $0.80 outcome versus $1.03 expected after exchange hours – less because of the scale of the drop and more owing to this tickers cult status among market participants the past year. If Tesla continued to drop while GameStop continued to climb, I believe the broader market would follow the former.

Chart of Tesla and After Hours (Daily)

S&P 500 Breaks Lower as VIX Soars: Will Tesla and Apple Overshadow GameStop?

Chart Created on Tradingview Platform

And, always a proponent of probability versus potential, it is worth noting that a bullish versus bearish view from one asset may skew one way while a separate benchmark may leverage the opposite course. I’ll remind that in my survey from earlier in the week that those that voted on what assets were most sharply disconnected from underlying value, GameStop was the top choice. Yet, recognition of that excess doesn’t seem to represent the same threat as the same to Tesla. GME is born higher by a crowd that fully disregards traditional valuations while TSLA is a new S&P 500 darling. It is worth gauging not only what is being used as the moral authority but also whether they will exert greater impact on a bullish or bearish course.

Twitter Poll: Which Asset is Most Disconnected from Traditional Fundamentals

S&P 500 Breaks Lower as VIX Soars: Will Tesla and Apple Overshadow GameStop?

Poll from Twitter.com, @JohnKicklighter

There is a Bubble

Though many have floated this balloon multiple times these past days and weeks, it is worth reiterating: I believe the financial system is bearing witness to a bubble. That said, bubbles do not simply pop because they are recognized. If only our psychology were so adaptive. Nevertheless, the risk that the ‘good times’ fall apart in the foreseeable future is dangerously high. Whether passive investor or freshly minted Reddit inductee, market participants should at the very least prepare with a contingency plan. My adaptation is to raise my requirement for conviction on setups and to shorten duration.

Twitter Poll: When Will Capital Markets Put in for the Next Bear Market

S&P 500 Breaks Lower as VIX Soars: Will Tesla and Apple Overshadow GameStop?

Poll from Twitter.com, @JohnKicklighter

A different view of the same problem, I am keeping close watch on the search traffic around bubbles. According to Google trends, the interest/fear in this potentially destructive scenario continues to rise to levels not seen since 2005. Having experienced the fallout of multiple bubbles in the past, I know my tolerance for the erratic ‘potential’ during these periods falls far short of the ‘risk’ that eventually follows.

Google Trend Search Interest for ‘Market Bubble’ in the US

S&P 500 Breaks Lower as VIX Soars: Will Tesla and Apple Overshadow GameStop?

Chart from trends.google.com/trends

Finally, not all elements of the market follow the fads and extremes in sentiment. A look further towards the ‘mundane’ fundamentals and most liquid of benchmarks, EURUSD has worked its way deeper into its head-and-shoulders pattern – this formation with the neckline standing at 1.2065 which is the 38.2 percent Fibonacci retracement (learn more about ‘Fibs’ here) of the past three months. This pair has held its boundaries despite the Fed’s commitment to stimulus, the ECB’s suggestion it is threatened by Dollar weakness and last week’s serious PMI contrast in favor of a drop. Perhaps the US 4Q GDP update today will tip the scales? I won’t hold my breath though.

Chart of EURUSD with 20-Day Moving Average and 10-Day ATR (Daily)

S&P 500 Breaks Lower as VIX Soars: Will Tesla and Apple Overshadow GameStop?

Chart Created on Tradingview Platform

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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