A wave of selling hit US markets overnight, which should flow through to our market today.
Notably, the NASDAQ was the biggest decliner, falling 1.5%, compared to a 0.7% decline in the Dow and a near 1% fall in the S&P 500.
If you read yesterday’s issue of Rum Rebellion, you’ll know that I have a special interest in watching the NASDAQ.
The bull run of the past few years has been all about tech. The way I see it, if the bull is running out of steam, you’re going to see it in the NASDAQ first.
So following the strong June rally, which took the index back to the 2018 and 2019 highs, you’re now seeing prices turn back down again. This is potentially the third time the NASDAQ has tried and failed to break through this level (see chart).
That’s a worry.
I say ‘potentially’ because it’s not panic stations just yet. The index may simply be correcting the strong, central bank/liquidity driven gains made in June, before making another upward move and breaking out to new highs.
But I doubt that’s the case.
There are two specific reasons for that, which I’ll get to in a minute.
But first, a quick update on the gold price.
A quick update on gold
Overnight saw a bit of weakness creep in. I mentioned this as a possibility yesterday too. As bullish as I am on gold, it’s clear that it has overextended in the short term and needs to correct.
I showed you yesterday how the ‘relative strength index’ on the Aussie gold price chart was way overbought. That suggests the rally needs to take a breather.
There is another indicator that suggests the same thing.
It’s the positioning of traders in the US futures market.
In mid-April, the ‘Managed Money’ category (which is a kind of proxy for hedge fund traders) was net short 33,000 gold futures contracts. That means, as a group, these traders were betting on gold prices going lower.
But based on the latest reading (18 June) these traders are now net LONG 150,000 contracts. That’s a big turnaround in a few months. You can see the pace of it in the chart below. This chart is updated with a few weeks lag, and so isn’t up to date. But consider the net position is at 150,000 contracts, and will probably jump again when it’s updated at the end of the week to reflect positioning at 25 June, and you can see how sentiment has turned massively in the gold market.
While that’s a bullish development, in the short term, futures traders have all rushed over to one side of the boat.
So, to reiterate, expect a pullback. I have no idea what the extent or duration will be, but if you’re looking to gain exposure to gold, and have been watching from the sidelines so far, I believe it will be a good time to do so.
Reasons to be bearish over tech stocks
Getting back to tech stocks, there are two reasons to be bearish.
One: The trade wars with China will potentially hurt them the most. The large tech manufacturers have their supply chains in China. The Trump administration is trying to lesson that reliance on China, especially for strategically important tech manufacturing.
Two, and this is important: The social media giants are under regulatory scrutiny over political censorship claims. From The Federalist, last week:
‘Sen. Josh Hawley (R-Mo.) introduced legislation on Wednesday aimed at cracking down on “Big Tech’s political censorship.” Hawley’s Ending Support for Internet Censorship Act would amend Section 230 of the Communications Decency Act “to encourage” major tech platforms “to provide content moderation that is politically neutral.”
‘“Under Hawley’s bill,” Fox News reported, “big tech firms would have to provide evidence to the FTC proving that their algorithms and content-removal practices are neutral. Tech titans would also be responsible for the costs of performing audits, and would also have to re-apply for immunity every two years.”’
There’s little doubt that platforms like Facebook, Twitter and YouTube are an extension of the liberal, fake news media. Because of this, they act more like publishers of information rather than platforms to enable free speech.
This proposed bill is a big threat to them, and may be weighing on these stocks. If you look at the performance of the social media stocks over the past year (see below), you’ll see they have underperformed relative to the NASDAQ (which is ‘comp’ in the chart).
For the record, I think trying to regulate their behaviour is a dumb move. It’s just typical of a politician to think that you can regulate an industry to achieve a desired outcome.
There will be unintended consequences. There always is.
But for now, the market is worried about greater regulatory risk for the tech giants. It’s just another reason to be concerned that this long bull market is topping out.
Editor, The Rum Rebellion
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