The sell-off in stocks today continued as the Nasdaq composite led the session on the downside. The premier index for growth stocks fell 1.6% and registered its fifth drop in six sessions. Microsoft at one point dropped well more than 2% as the "Magnificent Seven" megacap techs felt even more selling pressure.
Microsoft undercut its Aug. 18 low of 311.55. Volume was light. However, the cloud computing and enterprise software giant still notched its seventh decline in eight sessions.
Adding to the brunt of the sell-off in tech land: Amazon.com sank 4% following news that it's being sued by the Federal Trade Commission and attorneys general of 17 states. The suit, filed in Seattle federal court, alleges the online retailing titan illegally holds monopoly-style power that keeps prices artificially high.
The lawsuit also charges that Amazon.com locks sellers into its platform, harming competition.
The Nasdaq's drop exceeded losses of almost 1.5% by the S&P 500 and 1.1% by the Dow Jones Industrial Average.
Perhaps reflecting growing fear over the future of the economy, the Dow Jones transportation average tripped 1.9% lower.
Broad Sell-Off
The Russell 2000 did only mildly better, but the small-cap index still lost 1.3%. At 1761, the Russell 2000 has given back all of its year-to-date gains.
On Sept. 5, the Russell 2000 dived back below its 50-day moving average and failed to rebound quickly, a clear sign of technical weakness. Last week, the 2000 also blitzed through its long-term 200-day moving average.
Overall volume in the market increased, indicating growing nervousness across equity trading desks. Nasdaq turnover rose 15% vs. the same time on Monday. That suggested even more distribution, or intense professional selling in stocks today.
NYSE volume was running lower throughout the morning, but turned 9% higher by day's end.
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Part of the selling pressure across stocks today stems from the ongoing sell-off in long-dated government bonds. The yield on the key U.S. Treasury 10-year bond edged up 2 basis points to 4.55%. At one point, the yield hit 4.56%. Yields on 10-year Treasuries have not seen these levels since January 2008.
Weakness in stocks comes after IBD downgraded the market outlook to "market in correction" on Sept. 20.
Please read this Sept. 20 The Big Picture column for more on why the overall environment worsened that day, warranting maximum caution regarding new buys and leading stocks in the market.
On Tuesday, JPMorgan Chase CEO Jamie Dimon commented in an interview with the Times of India that he is "not sure if the world is prepared for 7%," referring to the fed funds rate of borrowing for big banks. In July, the Federal Reserve pushed the fed funds rate up by a quarter point to a 5.25%-5.5% range. Then the U.S. central bank opted on Sept. 20 to stay pat on the cost of short-term money.
As reported by Barron's, quoting the India-based news source, Dimon added that 7% interest rates act as a worst-case scenario if the global economy suffers from stagflation, a combination of zero to low GPD growth and persistently high prices.
According to the CME FedWatch survey of bond traders, the probability of a final rate hike for 2023 remains low at 16.4% at the Nov. 1 meeting and 37.7% at the final Fed meeting on interest rates in 2023 scheduled on Dec. 13. Also, bond traders see only a 4.2% chance that the Fed would boost the fed funds rate by half a point to a 5.75%-6% target, and 33.5% chance of a quarter-point hike to 5.5%-5.75%.
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Long-Term Leader Candidate Gets Punished
Among other stocks today that made big moves, Cintas, part of the IBD Long-Term Leaders Watchlist, nose-dived 5.3% in heavy volume and hit a session low 480.39. That marked a two-month low. Turnover jumped 120% above its 50-day average.
On Sept. 14, the corporate uniform supplier broke out of a six-week flat base that offered a 518.71 buy point. Today's loss erases more than 7% from that entry, which is a primary sell signal.
Volume was not robust on the breakout day. One day later, CTAS shares fell sharply in even heavier turnover. That's exactly the opposite of what you want to see in a leading stock that is trying to break out to new highs.
On July 13, Cintas reported decelerating growth in earnings and sales for the August-ended fiscal first quarter. The company grew earnings by 9% vs. a year earlier to $3.70 a share.
CTAS stock has done well in 2023, making ground after clearing a base-on-base pattern at 470.23 in the week ended May 12. However, it threatens to give back all of those gains from the proper buy point. Such action triggers the defensive round-trip sell rule.
Cintas has grown earnings per share by 9% to 19% vs. year-ago levels in the past eight quarters, according to MarketSmith. The 5-year EPS growth rate of 15% is solid for a company that has a market value of nearly $49 billion. The 5-year Earnings Stability Factor of 4 is excellent on a scale of zero (rock solid profits) to 99 (most volatile).
The stock holds an 88 Composite Rating on a scale of 1 to 99, down from a previously top-drawer 96 within IBD's commercial services-outsourcing industry group.
Microsoft Stock Analysis
Microsoft stock has pretty much performed toe to toe with the Invesco QQQ Trust ETF, a tech-heavy ETF. Over the past 12 months, the former has gained 30.9%, and QQQ 29.1%. Both are doing much better than the 16.9% rise by SPDR S&P 500 ETF Trust.
Given that Microsoft has now undercut its recent low, watch for a potential reversal. A shakeout is healthy. But a reversal may suggest institutional holders are deciding it's a good time to grab shares at a discount.
With this week's low, MSFT may be working on a double-bottom base. This pattern includes two sharp sell-offs; ideally, the second sell-off should undercut the first sell-off low. But the stock has a lot of ground to recover to form such a bullish chart pattern.
According to IBD Stock Checkup, Microsoft ranks No. 2 overall within the desktop software industry group, just behind Adobe. MSFT sports a solid 94 Composite Rating, which combines fundamental, technical and fund ownership metrics into a single score.
Please note that the Composite Rating is best used as a stock screening tool, not for timing buys or sells in shares.
This pattern has been seen among fantastic big winners in the past, from Cisco Systems back in October 1990 to Nokia in 1998 to Palo Alto Networks from August to November 2020.
Palo Alto is working on its third weekly decline. Watch to see if PANW tests its August low of 201.17.
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Wall Street sees earnings growth slowing sharply in Palo Alto Networks, to 3% growth in fiscal 2024 (which ends in July next year) and 6% growth in fiscal 2025. Despite these figures, Palo Alto remains a tech leader among stocks today. It boasts a 97 Composite Rating on a scale of 1 to 99.
Meanwhile, analysts surveyed by FactSet expect 12% EPS growth for Microsoft in fiscal 2024 and a 15% increase in fiscal 2025.
Microsoft's revenue grew 11%, 2%, 7% and 8% vs. year-ago levels over the past four quarters (the quarters ended September 2022 through June of this year). That's a notable slowdown from year-over-year gains of 22%, 20%, 18% and 12% in the prior four quarters.
Nonetheless, Microsoft has attracted even more institutional dollars.
The number of mutual funds owning a piece of the company lifted to 9,704 funds at the end of the second quarter vs. 9,525 in Q1 and 9,043 in Q2 a year earlier.
In other financial markets, crude oil futures rallied 1% to $90.61 a barrel on the Nymex. Gasoline futures ramped up 1.1%. Copper dropped 0.7%. Gold fell nearly 1% to $1,919 an ounce.
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