Nasdaq Drops 4.6% in Three Days

The stock market is flattish so far this morning. Friday and Monday were pretty ugly days, especially for momentum stocks. In the last three days, the Nasdaq has dropped 4.6%. That’s its worst three-day loss since 2011.

The key aspect of the recent market action is that it’s a valuation-based rotation. By that, I mean that stocks with high valuations have been clobbered, and that pretty much includes the entire biotech sector.

But here’s the interesting part—the rotation is not a cyclical one. Many of the economically sensitive stocks have barely budged. The Morgan Stanley Cyclical Index ($CYC) continues to move up to relative strength highs.

I’ll give you a perfect example. While the Nasdaq has moved down, IBM ($IBM) has been just fine. The rotation isn’t affecting tech, it’s affecting highly valued tech. Check this out from Bloomberg:

The Nasdaq Composite Index trades at 32 times reported earnings of the companies in the index, compared with 17 times for the S&P 500. The 100 biggest companies in the Nasdaq gauge trade 64 percent above the S&P 500 relative to sales and 149 percent higher relative to estimated revenue, data compiled by Bloomberg show.

I should point out that many traders are clearly nervous. On Friday, the Nasdaq 100 fell the most in two years. The volume of puts on the Nasdaq 100 ETF ($QQQ) topped 1 million. That’s the most since the Flash Crash four years ago.

Posted by on April 8th, 2014 at 10:01 am


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