Stock market dives — a 20% plunge in some hot stocks could be next

Brian Sozzi
Editor-at-Large

Thursday’s mysterious selloff in the markets has some on Wall Street beginning to wonder if the next move is lower...way lower.

The Dow Jones Industrial Average was down close to 300 points by early afternoon trading. But how it got to that point has traders mildly concerned. After a respectable open where bellwether Apple traded in the green momentarily, the Dow plunged to a session low of roughly down 388 points. The index rebounded by noon, but not a whole heck of a lot.

Meanwhile, the S&P 500 and Nasdaq Composite were down more than 1% by early afternoon. Selloffs could be seen in a good number of the momentum stocks that have powered the month’s long market melt-up. Advanced Micro Devices fell 4%. Tesla shed 4%. Microsoft lost 3%.

The profit-taking came despite big deal news that theoretically, should have spurred interest in buying stocks. Morgan Stanley said it will plunk down $13 billion of its own stock to buy online brokerage outfit E-Trade. L Brands unloaded its struggling Victoria’s Secret brand to private equity shop Sycamore Partners for $525 million in cash.

SunTrust Chief Markets Strategist Keith Lerner says it has been hard to pinpoint the exact reason for the selloff today. But he notes a part of it may be technical selling related.

‘Ripe for a pullback’

Other experts tell Yahoo Finance small factors may be beginning to weigh on the collective minds of investors. They include the 10-year U.S. Treasury yield hovering around 1.5%, clearly a safe-haven type move (and an odd one at that alongside a record-setting market rally). Gold prices are at a cycle high. The Japanese Yen cratered to a nine-month low on Wednesday, following news earlier in the week GDP in the country dropped 6.3% in the final quarter of 2019.

Add to it the deadly coronavirus outbreak starting to wallop the bottom lines of major companies (see the profit warning today from Norwegian Cruise Line), and investors may be waking up to the notion they have been too complacent on the effects of the situation.

“Even before the coronavirus became an issue, the market was becoming priced for perfection,” Miller Tabak strategist said on Yahoo Finance’s The First Trade. “The market goes up every single day and it shows in mind there is too much complacency in the marketplace. I think we are getting ripe for a pullback, more than we have seen in quite some time.”

Maley thinks we could soon get a 15% to 20% correction in red-hot momentum stocks such as Apple, Tesla and Nvidia as the broader market adjusts. “We are getting ripe for a pullback, and those stocks will come down the most,” Maley says.

Veteran strategist Jack Ablin of Cresset tells Yahoo Finance he thinks stocks are 15% overvalued at the moment.

Fasten those seatbelts folks, it could be a fun Friday session.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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