Broker Check
 

Tech Stocks Finally Correct After Huge Run

| September 14, 2020
Share |

After gaining over 75% from its March 23 low, the tech-led Nasdaq Composite finally corrected to start September, its worst two-week performance since the first quarter selloff. In just three trading days, the index shed 10%, which was the fastest such correction from an all-time high on record1 

It is no secret that shares in technology companies have done most of the heavy lifting for the market’s resurgence. As investors digest the potential short and long-term ramifications of various COVID-19-induced trends, such as working from home, companies that appear well positioned have seen their shares bid up most feverishly.

There are no doubt shifts taking place in the economy, but we would exercise caution when growth or trends get too far extrapolated into the future.

Some of the sentiment may be due to the recent wins from the newest investors. As we have noted before, the recent surge in new account openings and the advent of commission-free trading has caused retail trading to have a resurgence this year. In fact, retail trading recently accounted for 44% of total trading activity, says Jefferies strategist Steven DeSanctis, up from 25% in 20091.

Not only is retail trading up, but activity has become more levered with a surge in options trading. Options allow for a much smaller capital commitment for a commensurate exposure in underlying shares. As Barron’s highlighted this weekend, options volume in single-stock equities averaged a record 18.4 million contracts a day in August, up about 80% from the average monthly volume during 20192.

Not only are options volumes up, but a higher proportion of options trades are now for single contracts, an indication of smaller investors speculating in the market. 

Jason Zweig did an excellent job discussing the risks of options trading for the average investor in Friday’s Wall Street Journal (see source below). In summary, although options can magnify gains, they can also quickly magnify losses. The randomness of the market and individual stock returns in the short-term make options a very risky bet for the average investor. More importantly, you do not need the leverage of options to create wealth in the stock market.

Jeff Bezos, currently the richest man in the world, once asked Warren Buffett (at that time the richest) how he accumulated so much wealth with such a simple investment thesis. After all, why wouldn’t everyone just copy him?

Warren Buffett responded by saying, “Because nobody wants to get rich slow.”

Jack Holmes, CFA®

WealthPlan Partners 

Sources:

  1. https://www.barrons.com/articles/the-market-is-a-bubble-but-that-doesnt-mean-troubleyet-51599862332?mod=past_editions
  2. https://www.barrons.com/articles/how-retail-investors-are-fueling-the-nasdaqs-wild-ride-51599866516?mod=past_editions
  3. https://www.wsj.com/articles/are-you-an-investor-or-a-gambler-thestock-market-knows-11599836443?mod=itp_wsj&ru=yahoo 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing.  Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future.

All indices are unmanaged and may not be invested into directly. Advisory services offered through Feltz WealthPLAN, DBA of WealthPLAN Partners.  Securities offered through Securities America, Inc., Member FINRA/SIPC. Feltz WealthPLAN and Securities America are separate entities.

Share |

Check the background of your financial professional on FINRA's BrokerCheck.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named representative, broker - dealer, state - or SEC - registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Securities offered through Securities America, Inc. Member FINRA/SIPC. Advisory services offered through Feltz WealthPLAN, DBA of WealthPLAN Partners.. Feltz WealthPLAN is not affiliated with the Securities America companies.

Privacy Note

This website is not an offer to buy or a solicitation to sell securities. 

This site is published for residents of the United States and is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security or product that may be referenced herein. Persons mentioned on this website may only offer services and transact business and/or respond to inquiries in states or jurisdictions in which they have been properly registered or are exempt from registration. Not all products and services referenced on this site are available in every state, jurisdiction or from every person listed.


The third-party comments displayed are not verified and may not be accurate and are not necessarily representative of our client experience.