Onetime market darlings like electric-car marker Tesla, online retailer Amazon and streaming video service Netflix have quickly gone from market leaders to market pariahs. In the past three trading sessions, the Nasdaq composite has tumbled 4.6%, extending its losses from its recent 2014 high to 6.4%. In that same span, Tesla has plunged 9.9%, Amazon, 7.1% and Netflix, 6.9%.
The steep and rapid descent of these former highfliers was likened to a "50 car pile-up" by Gary Kaltbaum, president of Kaltbaum Capital Management. "Call them what you want — risk areas, growth stocks, froth areas — they are melting away."
Wall Street pros say the end of the "momentum" trade, which favored pricey stocks with good growth stories and a populist following, comes as fast-money traders exit these onetime winning investments ahead of what's expected to be a challenging first-quarter earnings season caused by wicked winter weather.
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There is growing concern that the loss of the market's leaders could take time to repair and even cause selling to bleed into less-frothy parts of the market, says Craig Johnson, chief technical market strategist at Piper Jaffray.
Both the Dow Jones industrial average and Standard & Poor's 500 dipped another 1% Monday, but they're down just 2% and 2.4%, respectively, from their all-time closing highs.
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Johnson sensed trouble late last week, when the broad market eked out a small gain but many "go-go" names in the biotech and Internet space were "off anywhere from 10% to 20%," prompting him to warn clients of "sub-surface tremors" hidden below the market.
"The market leadership just got hit," says Johnson. "When the momentum players are stepping out of the market, it tells me something bigger is coming. The pullback is still unfolding."
Investing in pricey stocks when corporate profits are expected to grow! at a sub-par 1.1% clip in the first quarter of 2014, vs. the same period a year ago, is a risky venture. Profits grew nearly 10% in the final quarter of 2013. It explains some of the motivation for the recent selling. Many highflying names now falling back to earth sport price-to-earning ratios of 100 or more, vs. an overall market P-E of roughly 16, based on this year's earnings.
"Many of the highfliers have no earnings and nothing is worth an infinitesimal P-E," says Scott Black, president of Delphi Management, an investment firm that specializes in buying under-valued shares. "It is ridiculous to chase names like Netflix, Pandora and Tesla. That is speculation."
There's no question some of the "froth is being taken out of this market," says Doug Cote, chief market strategist at ING Investment Management.
The unwinding of these more speculative trades is "damaging investor sentiment," he says.
But Cote says the sharp pullback is "normal" and "positive" and stresses that the market's fundamental underpinnings are still strong. He says many companies are likely to top the low profit expectations for the just-ended quarter. He also says the stock market will get support from a strong U.S. consumer benefiting from rising home prices and record wealth following the big stock market rally the past few years.
"In a way, the market is regrouping, and refocusing on the fundamentals," says Cote.
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