It’s far from a market in turmoil, but a day after stocks touched record highs it is a market getting drilled with some valid fears.
The Dow Jones Industrial Average tanked nearly 500 points in early afternoon trading Thursday as investors showed concern that the plunge in the 10-year Treasury yield was signaling an economic growth slowdown later this year. Driving that potentially dreaded macroeconomic slowdown would be two factors, traders reasoned. First, the Delta variant of COVID-19 that is sweeping across the world. And two, the Federal Reserve moving to taper its bond purchases before year end.
Hence, the newly expressed concerns by traders on the ever-expanding valuations in many areas of the equities market today.
“If I do the number-crunching, I put the market at about 4% overvalued. The upside potential between now and the end of 2021 is 0.4%, which is a pretty low number. You never get these numbers exactly right, but it’s certainly not a very compelling number,” said Hugh Johnson Advisors founder and chief investment officer Hugh Johnson on Yahoo Finance Live. “So the valuation levels are such that quite frankly — and this was before we saw what happened today [in markets] — they are not very compelling.”
The sell-off thus far is widespread.
All of the Dow’s components are in the red, except for somewhat defensive names such as IBM, Amgen and Nike. The Nasdaq Composite, Russell 2000 and S&P 500 were also solidly in the red.
The Yahoo Finance Trending Ticker page was riddled with former high-flyers getting pounded during the broad risk-off session.
Coinbase is the number one trending ticker on Yahoo Finance, dropping 4% amid another rout in cryptocurrency prices in the past 24-hours. Semiconductor stocks also continued to relatively underperform the market, with chip giant AMD leading the way lower at a 4% loss on the session.
“Stocks like Nvidia, Microsoft, Apple, Google, Intuit, Cloudflare have all become quite overbought on a short-term basis. The Nasdaq Composite index and XLK technology ETF have become overbought as well,” flagged Miller Tabak Chief Markets Strategist Matt Maley in a research note. “We are not saying that long-term investors should dump these names in an aggressive manner. However, they should still consider raising some cash in these (and other) names right now… so that they have money to put to work once a correction has played out.”
Generally, strategists don’t believe one rocky session marks the start of a correction (10% pullback) or bear market (20% pullback).
“I’m not kissing off this bull market. I still think it’s a bull market that has further to go,” Johnson says. “It’s not the start of a bear market that’s going to be accompanied by a recession. That just simply is not in the cards.”
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