Stocks have just broken a five-week winning streak after a major reversal in major tech stocks last week. Large losses on Amazon, Apple, Microsoft and Facebook – the market leaders of 2020 – led the high-tech Nasdaq Composite down 3.3% to suffer its worst week since March 20. The Dow and S&P 500 fell 1.8% and 2.3% last week, respectively, posting their biggest weekly losses since June.
Many on Wall Street believe the weakness stems from concerns that the massive surge in technology has pushed valuations to unsustainable levels. Aggressive buying of growth stocks has also spilled over into options markets. Even with last week’s pullback, the Nasdaq is up more than 70% from its March low.
“Given how far many indicators we track had become at the start of last week, we believe it will take more than a slight dip to remedy these conditions,” said Matt Maley, chief strategist of walked to Miller Tabak, in a note. on Sunday. “Therefore, we still believe that a correction of more than 10% is likely. ”
Maley pointed to the extreme overbought conditions of some of the megacap names as well as the high valuation levels of the S&P 500.
Last week’s Big Tech slump coincided with an outperformance of cyclicals – the names most sensitive to the economic recovery. The materials and financials sectors of the S&P 500 were the two biggest gainers in the previous week, up 2.3% and 0.9%, respectively.
In the midst of the big spin, the Cboe volatility index, known as the VIX or the market’s “fear gauge,” hit a high of 38.28 on Friday, its highest level since June 15.
To subscribe to CNBC PRO for exclusive news and analysis, and live business day programming from around the world.