Stock Market Plunge: Why You Should Buy
Stocks took a dive Thursday — the NASDAQ NDAQ lost 5%; Tesla TSLA plunged 9%; and Apple AAPL was down 8%.
Why did stocks fall? What should you do? I don’t know — but my guess is that the plunge was due to option-related trading that exaggerates market moves both to the up and downside.
Nothing has changed in the last two days to affect the financial prospects of the large capitalization technology stocks that have driven the rise in the market. You should keep buying on this big dip.
What Just Happened?
On September 3 the Nasdaq Composite index plunged 5% and the S&P 500 tumbled 3.5%. Tech stocks suffered the most — Microsoft MSFT 6% and Amazon AMZN 5% took less severe hits than Tesla and Apple.
I think that the simple explanations offered for what happened are baseless. Here are three examples:
- “Investors all of a sudden realized how overbought stocks are and sold,” said LPL Financial. If that was true, which investors did LPL LPLA speak with and what was the specific trigger for their collective selling decision?
- “Further deterioration with US-Chinese relations,” opined Oanda. What happened yesterday to trigger investors’ conclusion that those relations were deteriorating and which investors decided to sell stocks on that amorphous trigger?
- “Cyclical sectors are expected to perform better as the economy is recovering,” noted CNN. This one is at least anchored in the reality that cyclical stocks such as cruise operator Carnival CCL.U advanced 5.2% and Macy’s M rose nearly 8%, according to CNBC. Yet it is unclear which specific investors CNN interviewed to make this claim and what specifically happened yesterday to trigger this sectoral rotation.
What Really Caused Stocks To Fall Yesterday?
Without real-time reporting on the specific trades of the largest volume traders and the reasons for those trades, nobody knows why stocks fell yesterday.
This leaves unanswered many questions that would help us understand what happened: Who were the biggest volume traders in yesterday’s selloff? Were they Robin Hood investors? Computer-driven traders? Hedge funds? Which stocks did they buy and which did they sell? What specific changes triggered these trading decisions?
Although I do not know the answers to these questions — and I do not think any market analysts do, as a tech stock investor I have seen this pattern of sectoral rotation over the last year. Here are two examples illustrated with changes in Amazon’s stock (and others) this year:
- Pandemic plunge. Between February 20 and March 16, Amazon stock lost 22% of its value. It’s likely that this plunge was a result of investors shedding stocks as it became clear that Covid-19 would be deemed a pandemic which would lead to an economic shutdown in an attempt to stop its spread. After that Amazon stock soared as people turned more to online shopping companies turned to cloud computing providers like AWS.
- July correction. From July 9 to July 17, Amazon stock lost 7.5% of its value. As CNBC reported, Facebook, Alphabet and Microsoft all declined during that period. There was no clear explanation for the decline. After the July correction, tech stocks resumed their rise — featuring exceptional meltups this week — such as Zoom Video’s 35% pop on August 31 after its revenue quadrupled.
Since peaking on September 1 at $478 a share, Zoom has lost 20% of its value and was poised to fall more as of September 4 pre-market trade. I do not know what happened between September 2 and September 3 to so severely damage Zoom’s financial prospects.
Perhaps investors are in sudden need of cash and are selling the stocks which have enjoyed the biggest increases to meet their cash needs. Indeed, as I wrote in February the crash that month may have been propelled by trading of so-called put options that go up in value along with a rise in the volatility index.
Today, the Wall Street Journal argued that options trading might have had an effect on the September 4 plunge as well. The Journal also reported that Softbank had been a big buyer of call options on large capitalization technology companies including Adobe ADBE , Netflix, Facebook, and Microsoft — all of which contributed to their rapid increases this summer.
What Should You Do About It?
I will give the advice that I follow — keep investing every month. If you buy stocks when they are down and they resume their upward movement, you will be better off.