Shareholders are licking their wounds this Labor Day weekend after a two-day massive sell-off that nearly tipped the high-tech Nasdaq Composite into a correction.
Two days of strong selling pushed the benchmark down 9.8% before starting to trim losses.
By the time the dust settled, the Nasdaq had lost 6.17% and the S&P 500 had lost 4.3%, both avoiding 10% declines from recent peaks that would have constituted corrections and dealt a blow to sentiment. market still grappling with a downturn caused by the global COVID-19 pandemic.
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For now, both indices are still well above their March lows when the pandemic shut down large swathes of U.S. industries. The Nasdaq surged to 76% of its bottom while the S&P 500 rallied 60% as the Federal Reserve took unprecedented steps to stabilize the economy.
The massive gains and the massive sales that followed were driven by heavy investments in huge Silicon Valley companies that exert a disproportionate influence on the indices.
Investors gathered in Amazon Inc., Apple Inc., Alphabet Inc., Facebook Inc., Microsoft Corp., Netflix Inc., Nvidia Corp. and Tesla – bringing their market cap to 48% of the Nasdaq before the two-day swoon. has begun. The seven non-Tesla stocks represented 28% of the S&P 500.
“It might not be the biggest bubble ever, but it’s the most concentrated stock market ever,” David Rosenberg, chief economist and strategist at Rosenberg Research, told FOX Business. , based in Toronto.
Signs of moss had been forming for weeks as the Investors Intelligence poll showed 64% bulls and 16% bears. The last time the spread was this large was before the December 2018 sell-off that cut the S&P 500 by 16% and the Nasdaq by 17%.
The surge in prices had pushed valuations into the 99.6th percentile, just below their tech bubble highs, and caused stocks to hit levels above their moving averages which are seen less than 5% of the time.
When the S&P 500 ended Tuesday at a record high, the CBOE Volatility Index, often referred to as the stock market fear gauge, closed at its highest level ever during a spike.
It is becoming clear to professional investors that volatility has been heightened by rampant speculation in the options market, both from Japanese tech investor SoftBank Group Corp., which recently bought billions of dollars from options related to technology stocks; and a renewed interest in the instruments among retail investors.
NASDAQ HAS THE WORST WEEK SINCE MARCH
“The premiums paid, the volumes that we looked at, they took out the madness of the 2000 tech bubble,” said Jim Bianco, president and macro strategist at Chicago-based Bianco Research.
As the prices of options – which allow investors to bet that the value of stocks will rise or fall – grew higher and higher, market makers who were on the other side of these trades had to hedge their positions by buying the ‘underlying stock. .
This gave investors more confidence, forcing them to buy more stocks and more calls, and market makers then had to buy more stocks to hedge.
And then the momentum based trading algorithms started.
“It just feeds on itself, one after the other,” Matt Maley, chief Boston market strategist at Miller Tabak & Co., told FOX Business.
The market finally hit a breaking point on Thursday when major averages suffered their biggest one-day decline since June, with the S&P 500 falling 3.51% and the Nasdaq dropping 4.2%. The selloff continued in Friday’s session, with the two indices losing 3.05% and 5.08% respectively before making up for their losses.
It remains to be seen how far the market could fall from here.
Stocks would have to ‘crumble’ for Bianco to see this as’ more than just a period of churning and consolidation.
Meanwhile, Rosenberg, who believes a mean reversion is on the way, wouldn’t be surprised to see “half the run” retraced from the March low. He believes value stocks will outperform in relative terms, but that there must be a sustained rise in inflation, a sustained re-acceleration in global growth, higher interest rates and a steeper yield curve ahead. to “earn you money in real time”.
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One thing is certain, investors who have a plan will come out of this turbulence with their portfolios in great shape.
“If you have a plan in place ahead of time, you will be able to buy when other people panic,” Maley said. “And the people who don’t have a plan in place are the ones selling at exactly the wrong time.”