Stocks are plunging today, ripping the major indexes down from their recent highs. The S&P, Dow, and Nasdaq Composite all fell at the open despite strong corporate earnings.
Reopening-sensitive companies like airlines and cruise lines endured some of the largest losses. Even Procter & Gamble (NYSE: PG), which reported a solid earnings “beat” this morning, struggled to gain any ground. Other companies that reported fared slightly better, but overall, today’s trading session has been a dour affair.
“The key to determining that will be the sustainability of these earnings increases,” explained Sevens Report founder Tom Essaye.
“Most of the factors that are producing these blowout earnings results are typically considered one-offs.”
Investors and analysts alike are concerned that all the good news has already been priced into stocks. Wall Street banks have commented on this as well in notes recently released to clients.
Strategists at Morgan Stanley(NYSE: MS), Bank of America (NYSE: BAC), and Deutsche Bank (NYSE: DB) warned last week that a major period of turbulence could soon arrive.
That’s exactly what the current situation is signaling.
Bank of America released data this morning showing that last week, stock outflows hit a 5-month high. Healthcare, industrials, financials, and others were sold en masse. In fact, it was the fifth-highest amount of selling that the bank had ever seen.
And it happened right around the same time the S&P hit a new record high, oddly enough.
“Market weakness could continue near-term,” said Bank of America.
Bank of America’s client flows turned negative for the first time since mid-February, too. The bank now expects a pause in the “increasingly euphoric sentiment.”
Other analysts are concerned about “over-bullishness” as well.
“Many of our favorite sentiment gauges are becoming extremely bullish, which could be a near-term contrarian warning,” said Ryan Detrick, chief market strategist for LPL Financial in a note.
“The American Association of Individual Investors Sentiment Survey recently showed bulls outnumber bears by the most since January 2018.”
He continued, adding that “the 10- and 20-day average put/call ratios from the Chicago Board Options Exchange (CBOE) are above their 95th percentile – suggesting option markets are flashing a good deal of complacency.”
Goldman strategist David Kostin made a similar observation before highlighting reduced trade growth among retail investors.
“While online retail broker daily average trades are still up about 75% year/year, the growth in trading has dropped sharply from the peak of 250% in August 2020,” Kostin said.
So, across the board, it seems the whole market is buckling down for some selling. That includes major institutional investors and small-time retail traders as well.
How long it lasts and how far it goes is the million-dollar question.
It’s not time to panic just yet. But should the “crack” in the bull market (that started yesterday) starts to expand, a rapid correction could easily follow.
Even if American corporations continue to impress in terms of quarterly profits.
