Whatever else that means, and maybe not much, considering what happened the last time stocks did, Thursday’s stock drop was a justification for bearish strategists whose voice was growing louder.
Skepticism sounded smart, with big tech companies posting the biggest drop since March. Warnings that valuations were out of control and that investors would pay for their euphoria have been rolling for weeks amid a period in which the S&P 500 had 30 sessions without a 1% drop. On Thursday, it fell 3.5%, while the Nasdaq 100 lost 5.2%.
The Bears took a victory lap as high-profile stocks such as Zoom Video Communications Inc., Tesla Inc. and Apple Inc. pulled the Nasdaq 100 lower, after the index rebounded in 11 of 13 last sessions. Although the correction was abrupt, it was overdue given the saturation of the mega-cap tech trade, according to Sameer Samana of Wells Fargo Investment. And with the market’s attention likely to turn to the next US presidential election after the holiday weekend, traders will likely reduce risk, he said.
“While there wasn’t a single trigger, there is probably some nervousness and an increase in positions as a long weekend approaches,” said Samana, senior global market strategist. the society. “Considering the great race, you might even describe it as a profit taking.”
To be sure, that’s all it was on June 11, when the S&P 500 lost 6%. His return since then has been around 15%, even with Thursday’s drama.
Tech fueled the S&P 500’s nearly 55% rebound from its March lows. Momentum has picked up in recent weeks after stock splits from Apple and Tesla boosted stocks. By Thursday, the Nasdaq’s 41% gain year-to-date exceeded the lead of the benchmark US equities by around 30 percentage points. This pushed the relative strength of the Nasdaq on the S&P 500 to an all-time high.
“At some point you will surely see profit taking and repositioning within portfolios,” said Adam Phillips, director of portfolio strategy at EP Wealth Advisors. “It’s hard to know what the final straw was for investors, but the sale shouldn’t be so surprising. It was quite evident that the areas of the market were overexploited.
The warning signs were there. Implied volatility on the Nasdaq 100 increased even as the index rallied – a rare alignment that strategists said would end painfully, as growing demand for call options forced dealers to recalibrate their hedges. But if this so-called “short-gamma” hedge has raised stocks, it should logically also be able to exacerbate movements in the other direction. When stocks fall, market makers are likely to unwind hedges with increasing speed, resulting in more losses.
The equity volatility complex “acts ‘shattered’ and indicates ‘something has to give,'” Charlie McElligott, multi-asset strategist at Nomura Securities, wrote in a note Thursday. “It all adds up to feel like a recipe for tears. Ie ‘real’ potential for a Nasdaq / SPX of -6% to -8% on a single day in the next period of 1 to 2 minutes. “
While betting against the tech bubble in the 2000s was painful for those ahead, Thursday’s rout is an opportunity to rebalance away from the industry, according to Julian Emanuel of BTIG LLC. He is bullish on bank stocks, which are still suffering losses of more than 18% in 2020.
“If you have too much technology in your portfolio, now is the time to start taking a little bit of it with the winners and reallocating it to finance,” said Emanuel, chief equity and derivatives strategist at BTIG, on Bloomberg Television and Radio. “We believe the Fed has been a game-changer and financials will eventually lead the market higher in 2021.”