You knew this was coming.
The market internals had been flashing warning signs for a couple weeks: very few new highs, very sloppy advance/decline line, low short interest, and a lot of talk about FOMO (Fear of Missing Out) and TINA (There Is No Alternative).
All signs of frothiness.
So what is this? Is this a one-day event? Is it a 10% correction that lasts a couple months, and then reverts to growth, which is what happened in January 2018, when the market was similarly stretched? Or the start of a longer-term sell-off?
No surprise, the drop has been mostly a momentum-driven event. The heaviest selling has been in the highest momentum names (megacap) and beneficiaries of work-from-home sectors (robotics, cybersecurity, social media, gaming, etc.), with less volume in cyclical names like energy, utilities, telecom, and materials.
For the moment, the market is signaling the frothiness has gotten out of hand.
Apple goes from $120 to $137 back to $120 — in two weeks?
NVIDIA goes from $505 to $580 back to $505 — in five days?
Zoom Video goes from $300 to $480 back to $380 — also in five days?
“I think we will see more downside because when tech stocks get this overbought they tend to overshoot on the downside,” Matt Maley from Miller Tabak told me. “Tesla could go down 60% and still be above its February highs. Apple could drop 35% and still be above its February highs,” he said, noting that he doesn’t believe they will drop that far.
What about the Robinhood crowd—the retail traders who have been so active? Maley has little sympathy.