Meta (FB) shares lost around 20% post-market, which appears to be an overreaction and shows how wary buyers have become of the former growth leaders, the so-called FAANG stocks.
The sharp declines of former crowd favourites could result from a reassessment of the medium-term outlook, for example, due to changes in monetary policy. But they could also be the next domino effect in an impending bear market.
Netflix shares lost more than 30% in a few days following a disappointing report late last month and fell 50% from their peak in late November before fumbling for support from bargain hunters.
PayPal was not technically in the FAANG big league but was punished just as much, losing around 25% intraday yesterday. After Facebook, Snap (-15%) and Twitter (-7%) also took a tangential hit.
In our view, these are not isolated corporate stories but manifestations of broader underline currents. And in the coming days, we will have to determine whether we see a change in the bull market leaders or the first signals of a prolonged bearish trend.
In a bear market, the weakest stars are the first to fall, and then the vortex of decline attracts more and more strong participants.
The first domino is meme stocks, which had fallen methodically since June when the first signals emerged that the Fed was starting to prepare the markets for a wind-down.
Then we saw a peak in many high-tech stocks in November when the Fed started cutting back on buying.
By this logic, the downward spiral could pull more strong stocks into a downward spiral by the time interest rates rise, which is expected in March.
If we look more broadly, at the Nasdaq100 index, there is a rather worrying tech analysis picture. It is once again below its 200-day moving average. The high-tech-filled Meta retreated 2.4% after the report. The S&P500 and DJIA, however, look noticeably stronger on the technical analysis side.
But it is worth watching closely how the trading will go this week and whether the buyers will reverse the negative trend of the former Nasdaq favourites.
If so, we see a change in the leaders in the form of a rotation in value stocks and other names affected by the pandemic. But fears that the Fed is preparing to take money out of the financial system could force market players to take money off the table by selling blue chips.