Last month, when the Robinhood investor app announced plans to shut off the feed that showed what its clients were buying, data sleuths mourned. Chronicling the love affairs of retail traders in the stock market had become a pastime -- what would they do without it?
The information vacuum didn’t last long. On Monday, enticed by stock splits at Apple Inc. and Tesla Inc., demand from amateur equity enthusiasts was again thrust into plain view -- when their orders crashed discount-brokerage websites all over Wall Street. The wailing crush of buying added $200 billion to the market value of the two tech giants, extending mammoth runs.
Now those gains are history, in one of the bigger spasms of the post-crisis recovery trade. A few days of gut-wrenching declines in Apple and Tesla were the harrowing welcome for anyone who bought in the split-induced frenzy -- a reminder that stocks don’t always go up, to correct a favorite saying. As brutal as it got on Thursday and for the first part of Friday, for many investing veterans, it was a correction long overdue.
“You have people thinking the market goes straight up forever and it doesn’t,” said Gerry Sparrow, president of Sparrow Capital Management Inc. “It was parabolic and it had to sell off eventually.”
Despite a rousing recovery in the week’s final hours, the Nasdaq 100 fell 6.4% Thursday and Friday, the fastest two-day plunge since mid-March. By the end of the week, shares of Apple were 9.9% off a record hit on Tuesday. Tesla had fallen as much as 22% in four days, technically putting the electric-vehicle maker into a new bear market, before it gained Friday.
While still too early to say if tech’s days of leadership are over, some investors see a lasting reversal as necessary -- even healthy. Day-after-day dominance in what came to be known as the stay-at-home trade -- companies that benefit and perform better in the Covid-19 world -- implied a bleak outlook for the economy.
“The demand for technology stocks was a reflection of expectations the economy would be mired in a prolonged ‘stay-at-home’ state,” said Ben Emons, a managing director at Medley Global Advisors. Better-than-expected economic data this week, including Friday’s jobs report, “proves that the reopening of the economy has gotten traction.”
That was visible underneath the week’s sell-off, with shares of banks and value stocks performing better than the broader benchmarks. The KBW Bank Index managed to gain for a fourth week in five, up 1.1%. On Thursday, the Russell 1000 Value Index beat its growth counterpart by the most since 2008.
The S&P 500, heavily weighted toward Apple, Microsoft and Amazon, fell 2.3% in the five days for its worst week since June.
“That rotation is in the beginning phase. Even without a vaccine, the economic recovery is starting to firm up,” said Seema Shah, chief strategist at Principal Global Investors. “There will continue to be demand for tech, it’s just that the magnitude of gains they have enjoyed over the past six months has probably peaked.”
As chilling as it all felt, amplified by its speed after what was virtually a straight up climb from equities’ lows in March, the pain was restrained next to the euphoria that has reigned for months. The Nasdaq remains up 66% since March 23, showing just how far the rally had run, with more than $6 trillion added to megacap shares in a matter of five months.
There were signs of market exuberance. Measures of implied volatility were rising alongside stocks. Even with shares at records, traders were opting for bullish call options rather than bearish puts at a record pace. The Nasdaq 100 has just come off its most relentless run since the dot-com era. The S&P 500 only fell on five days in the month of August.
Adding to this week’s drama were headlines showing SoftBank Group Corp. bought billions of dollars worth of options tied to U.S. tech stocks over the past month, forcing dealers to buy underlying stock and further fueling share prices. That mixed with a hoard of options activity from retail day traders made for a heady cocktail.
“It’s a good indication it had gotten pretty frothy,” said Kathy Jones, chief fixed income strategist for Schwab Center for Financial Research. “It’s been straight up for days on end and weeks on end, narrower and narrower leadership. That inevitably will lead to some sort of correction.”
As such, the stocks that led on the way up were the same to pull on the way down. Over the last few months, investors piled into the stay-at-home trade, snapping up shares of megacap tech stocks and popular Fang names with high cash balances, strong growth prospects, and fewer workers.
Before the end-of-week turmoil, the S&P 500 was up 11% in 2020. Without Apple, Amazon.com Inc., Microsoft Corp., Facebook Inc. and Alphabet Inc., that return would’ve been shaved to less than 1%. As of Wednesday’s close, the Nasdaq 100 was still up more than 40% this year. Remove those same five companies and Tesla from the mix, and the index’s return would’ve shrunk to almost a fourth of that amount.
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