They knew this was coming. The internals of the market had flashed warning signs for a few weeks: very few new highs, very sloppy forward / backward line, little short interest, and a lot of talk about FOMO (fear of leaving out) and TINA (there is no alternative).
All signs of foam.
What's this? Is this a one day event? A 10% correction that takes a few months and then returns to growth. What happened in January 2018 when the market was stretched similarly? Or is it the beginning of a long-term sell-off?
No wonder the sell-off was largely a momentum-driven event. The strongest selling were the most dynamic names (megacap) and the beneficiaries of work-from-home sectors (robotics, cybersecurity, social media, games, etc.), with cyclical names like energy, utilities, telecommunications and materials less volume exhibit .
Right now, the market is signaling the foam is out of control and who can blame investors?
Apple goes from $ 120 to $ 137 back to $ 120 – in two weeks?
Nvidia increases from 505 USD to 580 USD back to 505 USD – in five days?
Zoom Video goes from $ 300 to $ 480 to $ 380 – even in five days?
"I think we're going to see more moves down because when tech stocks get overbought like that, they tend to shoot down," said Matt Maley of Miller Tobacco. "Tesla could fall 60% and still be above its February highs. Apple could fall 35% and still be above its February highs," he said, noting that he doesn't think they will fall that far .
What about the Robinhood crowd – the retailers that have been so active? Maley has little sympathy.
"The Robinhood dealers have to burn themselves a bit. That will make them more honest. They are not just going to buy things with their fists. It will scare them and take some foam off the market."
Part of the problem with the recent rally is that much of it is not about fundamentals, as economist Mohamed El-Erian notes. In an interview on CNBC Thursday evening, El-Erian stated that there appear to be two types of investors in the market: "Are you basic or liquidity-based and rely on central banks to provide liquidity?" In the past, buying on the go has been a profitable opportunity "because the market is dominated by those who believe that the Fed's liquidity is the number one reason the market has risen.
He warned that the market could have a much tougher time if the market were dominated by traders who are more concerned about fundamentals.
Others disagree. Craig Johnson, technical market strategist at Piper Sandler, noted slight weakness but insisted that fundamentals continue to support stocks: "The record highs game book continues to work as economic data improves along with the outlook for a coronavirus vaccine" said he wrote in a note to customers.
One thing is certain: many people are ill-prepared for a lengthy sell-off. Seasoned trader Joe Zicherman of Stadium Capital told me that the "pain trade" – the trade that would do the most harm to most participants – failed because people buy the dips and they are very long.
If the sell-off continues on Friday, he expects the Fed, White House and Congress to move: "If it lasts longer than a few days, expect more aggressive action from the Fed and you will hear of suddenly increased chances of a stimulus deal. "
Nevertheless, it is worthwhile to put the sale in context. Apple is up 64% this year. Nvidia 120%. Zoom video 460%.
"Put in context today's market pullback, it brings the S&P 500 back to where it was last Wednesday – wait for it," said Greg McBride, chief financial analyst at Bankrate.com, in an e- Mail to CNBC.
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