Several high flying stocks have been pummeled in recent days due to poor reports, the latest being 3D printer maker 3D Systems (DDD) and social media darling Twitter (TWTR).
Shares of Twitter are down about 25 percent from their peak in late December, while shares of 3D Systems collapsed by more than 40 percent (before bouncing intraday yesterday) after peaking in early January. The loss highlights the risk in overvalued shares of companies that rely on optimistic forecasts along with optimistic investors. When the market is doing well and these shares miss their targets, the losses can be substantial in a short period of time. When investors are in a more pessimistic mood though, even a small miss can be magnified and shares can quickly collapse as buyers disappear.
In the wake of these brutal losses, we again took a look at the volatile solar and biotechnology industry, and what we saw is that the bulls still have reason for optimism. These sectors continue to hold up well in the face of major losses for some richly valued stocks. The market as a whole is trending lower, but investors aren’t stampeding yet – major losses are mainly confined to overvalued stocks with weak earnings or guidance.
That doesn’t mean a stampede isn’t possible. The market could quickly sell-off another 3 to 5 percent if investors decide to run for the exits, but there aren’t signs of larger sell-off yet. Investors would do well to remember that we’ve seen this before as recently as last year during brief sell-offs. When investors turn negative, all news is bad news (and when they are optimistic, even bad news is good news). Market gurus and analysts warning about a decline are given the center of attention and some deserve it for making prescient calls, even if one month ago they were nowhere to be found.
Put simply, the financial media is the ultimate herd follower and a rise in negative stories is probably a good sign that sentiment has bottomed in the short-term and a bounce is coming. Some of the stories are legitimate and getting increased focus, such as emerging market credit bubbles and a slowdown in Chinese growth rates, but the media likes to pile on with tertiary negative stories.
European markets already bounced overnight and U.S. markets are headed higher at the open. Look for sectors such as solar and biotech to lead a bounce higher, which would indicate bullish opinion and not short covering, since these sectors haven’t seen the heaviest selling. Consumer discretionary has actually been the worst performing sector this year; if it leads a bounce higher it wouldn’t invalidate the move, but it could mean the bounce is mainly short covering and not a return of the bulls just yet.