September 8, 2020

Last week ended with a sharp sell-off on Thursday and Friday, shaving about (using the S&P 500) 5% off the market.  The decline was led by the NASDAQ, specifically the biggest names in the technology sector.  The NASDAQ Composite dropped 3.7%, while the Dow declined 558 points, or just mote than 2% and the S&P 500 slid 2.5%.

“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 and record high call option volume – pointed to excessive optimism in the market which often suggests a consolidation/correction phase is likely.”

Reports have shown that Japanese SoftBank has been taking huge bullish options bets that the tech rally would continue and could have been a factor in tech’s recent rally, linked to as much as $50 billion in tech stock trades.  Tech may come under further pressure should SoftBank move to cover those bets.

While analysts have been quick to point out that this decline is largely confined to the tech and related sectors, the broad decline continues this morning.  “Traders and investors alike may slowly but surely come around to the idea that last week’s market rout was tech-sector specific, rather than any real change in underlying (market) sentiment,” said Stephen Innes, chief global markets strategist at AxiCorp.