Stocks fell sharply on Tuesday as technology shares were under pressure once again following their worst sell-off in more than five months last week.
The Nasdaq Composite dropped 4.1%. Tuesday’s drop put the tech-heavy Nasdaq down 10% over the past three days. In that time, the composite has fallen from a record into a correction on and intraday and closing basis.
The Dow Jones Industrial Average plunged 632 points, or 2.3%. The S&P 500 slid 2.8%.
Facebook and Amazon were both down more than 4% Microsoft and Apple slid 5.4% and 6.7%, respectively. Netflix closed 1.8% lower and Alphabet lost 3.6%. Zoom Video fell by 5.1%. The S&P 500 tech sector dropped 4.6% and closed Tuesday’s session more than 11% below an all-time high set on Sept. 2.
“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.”
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 fell 5.6% and 3.2%, respectively. Applied Materials dropped 8.7%. Advanced Micro Devices pulled back by 4%. The VanEck Vectors Semiconductor ETF (SMH) closed 4.4% lower.
Tesla plunged 21.1% — its biggest one-day drop on record — 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.
Wall Street was coming off its first weekly decline in six weeks 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 and S&P 500 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.
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 lobby 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.
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