The Nasdaq composite closed down nearly 10% in six trading days. This was accompanied by smaller sympathetic declines in the Dow, S&P 500, and Russell 2000.

I have a tough time calling last week’s reversal either stunning or surprising, as it pertains to the runaway train market in the NASDAQ and the particular route known as the FAANG line. Before the decline that began September 3, most anyone would have given the opinion that this group was at least way overextended and, in some cases, grossly overvalued.

Tech: A Pandemic Winner

When the COVID-19 crash began back in February, the market did its usual thing: took everything out back and brutalized it. However, the players quickly began to separate winners from losers (i.e., slower to recover names).

The Nasdaq broke out to new all-time highs and did not look back. Names like Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT) (basically, any tech with products in the consumer arena) had to be huge beneficiaries of the stimulus -- $1200 for every taxpayer below $75,000/$150,000 income limits, plus $500 per dependent.

Remember, even at the worst of the job losses in the United States, much of the workforce was still employed. These checks represented a huge windfall for many. It is no wonder that this found money might have had an impact: big earnings surprises at Apple and Amazon, people at home upgrading personal technology, and just shopping online.

Of course, the flip side to all of this is that there has been no additional stimulus passed to benefit outsized consumption, plus there was no universal extension of the supplemental unemployment compensation that came in the first stimulus bill. At best, if a state chips in, the number has dropped from $600 per week to $400.

In other words, the stimulus and unemployment benefits may have pulled demand forward to the detriment of the third quarter. Earnings may not be as strong in tech as some may be forecasting.

The Silver Lining

Despite the fact that there may be a significant back-up coming for tech, companies out of the lime light and the rest of the economy continues on a recovery path, with continuing evidence of green shoots in housing, durable goods orders, capital goods orders, and retail. These, too, have gained momentum because of the stimulus injected into the economy and the “multiplier effect” of that stimulus.

“Every time there is an injection of new demand into the circular flow of income there is likely to be a multiplier effect. This is because an injection of extra income leads to more spending, which creates more income, and so on. The multiplier effect refers to the increase in final income arising from any new injection of spending.”

Whatever part of the $2+ trillion stimulus program has been spent is now in recirculation mode along with a zero interest rate policy (ZIRP) from the Fed; another powerful stimulative force. My thought here is that now it may be time for leadership to pass to other, more cyclical parts of the market.

Meanwhile: sentiment falls off the cliff

Predictably, the bears have come out of hibernation and are calling for negative events in unison:

• Falling oil prices (as is usually the case) are cited as precursor for a weakening world and US economy.
• A weaker uptick than estimated in retail sales and slightly higher unemployment claims are cited as reasons for concern.
• COVID-19 — worry that another wave is on the way due to continued improper masking and social distancing behavior, back to school frenzy, and the run-of-the-mill seasonal influenza.
• The presidential election — President Trump’s own words give Democratic odds a boost.
• “October is Wall Street’s cruelest month” (article dated October 2, 2000).
• Cramer weighs in: “‘This market’s badly in need of another stimulus package."

According to the American Association of Individual Investors (AAII), sentiment took a real hit in their measurement week ending September 9. This is not surprising given the tech swoon and the bear points I laid out above.

“Bullish sentiment, expectations that stock prices will rise over the next six months, dropped 7.1 percentage points to 23.7%. Optimism was last lower on August 5, 2020 (23.3%). Bullish sentiment remains below its historical average of 38.0% for the 27th consecutive week and the 32nd week this year.

“Bearish sentiment, expectations that stock prices will fall over the next six months, rose by 6.7 percentage points to 48.5%. Pessimism is at a six-week high, tied with its July 29, 2020, reading. Bearish sentiment is above its historical average of 30.5% for the 29th consecutive week and the 31st time this year.“

It has been this type of above-average bearish sentiment and below-average bullish sentiment that has been a hallmark of the general market sentiment for the past 11 years.

I believe this puts us in a good place for a continuation of the secular bull market whose nascence occurred in March of 2009. Kort Sessions has made the assertion many times over the past seven years that until everyone embraces stocks, not just tech stocks but the whole market, we are in a position to move higher over time. It’s like Sir John Templeton said:

“ Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”

It is when euphoria about the market in general (not just one sector or a small group of stocks) arises that the game is over. Based on the skepticism and poor sentiment that has accompanied this market all the way up, we haven't even come close to the optimism phase yet.