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Friday, September 4, 2020 – 10:06 am
The skepticism seemed smart with big tech companies seeing the biggest drop since March.
Warnings that valuations were out of control and investors would pay for their euphoria have been circling for weeks amid a stretch in which the S&P 500 passed 30 sessions without a 1% drop.
On Thursday it fell 3.5 percent, while the Nasdaq 100 lost 5.2 percent.
The bears took a victory lap when high-flying stocks like Zoom Video Communications, Tesla and Apple Inc dragged the Nasdaq 100 lower, after the index rallied in 11 of the past 13 sessions.
While the correction was abrupt, it was overdue given how saturated megacap technology trading had become, according to Wells Fargo Investment’s Sameer Samana.
And given that the market’s attention will likely turn to the upcoming US presidential election after the holiday weekend, traders are likely to reduce risk, he said.
“While there was no trigger, there is probably some nervousness and squaring of positions heading into a long weekend,” said Samana, the firm’s senior global market strategist.
“Given the hot streak, it could even be described as profit taking.”
Surely that was all of June 11, when the S&P 500 lost 6 percent. Her return since then is around 15 percent, even with Thursday’s drama.
Technology has fueled the S&P 500’s nearly 55% bounce from its March lows. The dynamics accelerated in recent weeks after the Apple and Tesla stock split sent stocks higher.
Before Thursday, the Nasdaq’s 41% gain this year outpaced the advance of the benchmark US equity index by roughly 30 percentage points. That pushed the Nasdaq’s relative strength over the S&P 500 to the highest on record.
“At some point, you are sure to see some 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 sell-off shouldn’t be that surprising. It was pretty apparent that the market areas were over-extended.”
The warning signs were there. Implied volatility on the Nasdaq 100 has risen even as the index rebounded, a rare alignment that strategists warned would end painfully as rising demand for call options forced traders to recalibrate their hedges.
But if that so-called “short gamma” hedge raised stocks, logically it should also be capable of exacerbating movements in the opposite direction. When stocks fall, market makers are likely to undo the hedging at an increasing rate, causing further losses.
The stock volatility complex is acting ‘broken’ and indicates ‘something has to give,’ “Charlie McElligott, cross-asset strategist at Nomura Securities, wrote in a note Thursday.
“It all adds up to feel like a recipe for tears, that is, the ‘real’ potential for a Nasdaq / SPX -6% to -8% in a single day in the next 1-2 million time frame.”
While betting against the tech bubble in the 2000s was painful for earlycomers, Thursday’s loss is an opportunity to rebalance outside the sector, according to Julian Emanuel of BTIG. He’s bullish on bank stocks, which are still posting losses of more than 18% in 2020.
“If you have too much technology in your portfolio, now is the time to start taking some of it with the winners and reallocating it to finance,” Emanuel, chief equity and derivatives strategist at BTIG, said on Bloomberg Television and Radio. .
“We believe the Fed has changed the game and finance will finally lead the market to the upside in 2021.”
BLOOMBERG
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