Thought the sell-off was over?
As of noon, it seems like stocks want to dip further. The Dow, S&P, and Nasdaq Composite have already plunged 1.00%, 1.60%, and 2.1%, respectively, on the day.
And, what’s more, the correction might only get worse this afternoon if a “selling-frenzy” takes hold.
To Baird chief investment strategist Bruce Bittles, it’s a natural reaction given the recently bullish state of equities.
“High valuations in the mega-cap stocks are stretched far beyond historical levels,” Bittles said.
“The technical indicators – high margin debt, fully invested mutual funds, CBOE options data showing record call volume, Wall Street letter writers at bullish levels — pointed to excessive optimism in the market which often suggests a consolidation/correction phase is likely.”
Leading the descent this morning was Tesla (NASDAQ: TSLA), which fell another 16%. As it stands, TSLA is now down almost 30% from its all-time high. FAANG stocks are hurting as well.
Just last week, Wall Street bulls were out in force claiming that equities were primed to rise further, despite the overly-extended state of the market. Some, like Loup Ventures’ analyst Gene Munster, still think the “tech wreck” represents a chance to load-up on premium stocks at a discount.
“I would see this recent pullback as ultimately an opportunity to buy some of these bigger names,” Munster said when asked about Apple (NASDAQ: AAPL), Facebook (NASDAQ: FB), and Google-parent Alphabet (NASDAQ: GOOG).
But overall, sentiment is beginning to shift bearish in light of the sky-high Nasdaq valuations.
“Given how extreme many of the indicators we follow had become by early this past week, we believe it will take more than just a mild decline to work off those conditions,” said Matt Maley, chief market strategist at Miller Tabak, in a note.
“Therefore we still believe a correction of more than 10% is probable.”
For the Dow and S&P, that would mean another drop of roughly 4-5% is on its way. The Nasdaq Composite is already down 9.5% from its all-time high. A larger market-wide correction would likely cause tech to crater even more in an event that would draw comparisons to the dot-com bubble of 2000.
However, Capital Economics analyst Jonas Goltermann argues that the current situation isn’t nearly as dire as it was back at the top of the dot-com hysteria.
“Unlike in 2000, the largest tech firms today are highly profitable, and their valuations, while punchy, don’t look so obviously unsustainable,” Goltermann said.
“So while this correction may well have further to run, and we continue to think that tech stocks will fare less well than most other sectors as the economic recovery continues, we don’t expect that a collapse in tech stocks will drag down the entire market in the way that it did in 2000-02.”
In other words, Goltermann says that the rest of the market should be insulated from a tech slide, possibly resulting in a more equal distribution of funds among the different sectors.
Whether or not that actually happens is something investors will soon learn if the tech sell-off intensifies. As of this morning, healthcare, consumer cyclical, and communication stocks have only fallen slightly. Certain industries, like airlines, solar energy, and apparel manufacturing, are up on the day.
Thus far, it seems like Goltermann’s right. A tech correction has yet to “doom” the rest of the market.
And if certain groups of stocks remain safe in the near future, bulls should have plenty of great trading opportunities to look forward to.
Even with their portfolio’s “heavy lifters” – Big Tech stocks – taking a breather in the meantime.