Stock Market Consolidation with Rising Trading Volume: A Turning Point?
Stock Market consolidation with growing trading volume may signal that the market has picked. Consolidation or the beginning of a Selloff? Below we provide our analysis and insights.
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The stock market began the new month with a significant downturn. Major indices plunged at the opening, briefly stabilizing around midday yesterday. However, selling resumed in the afternoon, causing the Dow Jones Industrial Average to close over 600 points lower. The Nasdaq Composite dropped nearly 600 points, the S&P 500 fell by more than 100 points, and the Russell 2000 decreased by 3.1%. How to recognize if yesterday began stock market consolidation or it was a beginning of the selloff? We provide our insights.
First trading days of September
Trading volume surged today after being below average in recent weeks. The decline was attributed to typical consolidation activities.
The official NBS (National Bureau of Statistics) Manufacturing PMI, which tends to focus on larger state-owned firms, fell to 49.1 in August 2024 from 49.4 in July, missing market expectations of 49.5. It was the fourth straight month of contraction in China’s manufacturing activity and the steepest pace since February, as output shrank after rising in the prior five?months (49.8 vs 50.1). Moreover, new orders (48.9 vs 49.3 in July), foreign sales (48.7 vs 48.5), and buying levels (47.8 vs 48.8) all dropped for the fourth consecutive month. At the same time, weakness in employment persisted (48.1 vs 48.3). Concurrently, delivery time lengthened slightly (49.6 vs 49.3). On prices, input prices decreased sharply after showing signs of stabilization in July (43.2 vs 49.9). Meanwhile, output prices shrank for the third month with the steepest rate of fall (42.0 vs 46.3). Finally, sentiment softened for the second month running (52.0 vs 53.1).
The U.S. ISM Manufacturing Index for August 2024 was reported at 47.2. This was below the market expectations, which had forecasted a figure of 47.5. This represents a slight improvement from the 46.8 recorded in July 2024 but still indicates a contraction in the manufacturing sector (a PMI below 50 indicates contraction).
The current value of 47.2, although slightly higher than July’s 46.8, still points to a challenging environment for manufacturers.
Several factors contribute to this contraction:
In our view, this prolonged period of contraction can be attributed to various economic pressures, including supply chain disruptions, fluctuating demand, and still continuously rising costs. Historically, such trends can signal broader economic challenges, potentially impacting overall economic growth.
In response to growth concerns and weak economic data, Treasury yields declined. The 10-year note yield decreased by seven basis points to 3.84%, and the 2-year note yield dropped by four basis points to 3.89%. Additionally, the CBOE Volatility Index rose by 37%, or 5.55 points, to 20.55 as market participants hedged against further declines.
Almost all sectors experienced losses. The equal-weighted S&P 500 fell by 1.3%, with nine out of eleven S&P 500 sectors closing in the red. The information technology sector suffered the most, with a 4.4% loss, primarily due to profit-taking in its mega-cap stocks and semiconductor components.
The PHLX Semiconductor Index (SOX) plummeted by 7.8%, with NVIDIA (NVDA -9.5%) being a notable loser due to profit-taking. Technically, the Index is now playing with the 200-day moving average on a Monthly Chart with the key level to watch staying at 4,733. With the current lack of positive triggers we may expect the Index to move lower to the level of 4,530.
Cybersecurity stock ZScaler (ZS) dropped by 6% in extended trading after the cybersecurity firm reported fiscal Q4 results that beat expectations, but its fiscal 2025 outlook fell short. Zscaler expects to earn between $2.81 and $2.87 per share on an adjusted basis, below the $3.36 per share estimate. Sales are forecasted between $2.6B and $2.62B, also falling short of the $2.63B estimate. For the period ending July 31, Zscaler reported an adjusted $0.88 per share on $592.9M in revenue, up 30% year-over-year.
The Russell 2000 Index for small-cap stocks also failed to brake through the level of 230, which was critical for the continuation of the bullish move. Now we have to watch for the lower critical levels around 206.8 (100-day MA) and 201.7 (200-day MA).
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