Stocks fell sharply on Tuesday to start the week as technology shares were under pressure following their worst sell-off in more than five months last week.
The Nasdaq Composite dropped 3.1% and the Dow Jones Industrial Average plunged 540 points, or more than 1%. The S&P 500 slid 2.3%. At one point, the Nasdaq had fallen more than 3% and the Dow fell as much as 600 points.
“High valuations in the mega-cap stocks are stretched far beyond historical levels,” said Bruce Bittles, chief investment strategist at Baird. “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.”
Here’s what traders were watching:
- Tesla plunged 15% after the S&P Dow Jones Indices failed to add the surging and speculative stock to the S&P 500 after the bell Friday. Investors were betting on inclusion of the stock into the S&P 500, hoping for the stamp of approval on the rally by S&P. The snub shows the risks to the overheating Nasdaq trade.
- Other hot Nasdaq stocks were hit hard. Facebook, Amazon, Microsoft, and Google-parent Alphabet were all down at least 3%. Apple was down 4.2%, but briefly pared some of its losses after the tech giant announced an event on Sept. 15. Zoom Video fell by 3.6%.
- Shares of Softbank dropped 7% on Monday in Japan as it was identified as the big options buyer making a bet in the billions on tech stocks continuing to surge. The tech trade could lose some of its firepower if Softbank were to curb those bets.
- Semiconductor stocks were under pressure amid simmering U.S.-China trade tensions. Nvidia and Micron both fell 3.1%. Applied Materials dropped more than 7%. Advanced Micro Devices pulled back by 2.3%. The VanEck Vectors Semiconductor ETF (SMH) traded 3% lower.
- Drugmaker CEOs pledged to make safety the main priority in developing a coronavirus vaccine.
On Friday, stocks snapped a five-week winning streak after a big reversal in major technology stocks. Steep losses in Amazon, Apple, Microsoft and Facebook — 2020’s market leaders — drove the tech-heavy Nasdaq Composite to its worst week since March 20. The Dow posted their biggest weekly losses since June.
Many on Wall Street believe the weakness derived from worries that the massive tech run-up pushed valuations to unsustainable levels. Even with last week’s pullback, the Nasdaq is up more than 70% from its March bottom.
“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,” Matt Maley, chief market strategist at Miller Tabak, said in a note on Sunday. “Therefore we still believe a correction of more than 10% is probable.”
Maley pointed to the extreme overbought conditions in some of the mega-cap tech names as well as the elevated valuation levels for the S&P 500.
Last week’s Big Tech slump coincided with outperformance in cyclical stocks — names most sensitive to the economic recovery. The S&P 500 materials and financials sectors were the two biggest winners in the prior week, up 2.3% and 0.9%, respectively.
Geopolitical developments also weighed on investor sentiment Tuesday. China accused the U.S. of “bullying” as it launched a global data security initiative on Tuesday. That came as Washington continues to pressure China’s largest tech firms and convince countries around the world to block them. President Donald Trump also recently entertained the idea of “decoupling” from China, or refusing to do business with the country.
Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.
