An Interest(ing) Development

Trades Press Pause

In response to rapidly rising yields, traders pressed the pause button on the steady march upward in stocks of all colors, shapes, and sizes. It appears that a collective rethink about the return to normalcy party was in order as traders began fretting about the corresponding consequences.

As in, do we REALLY want to continue to pay up for growth stocks that may not grow quite as fast with rates on the rise? The short answer last week was, "uh, no." And this, dear readers, is the stuff that "corrections" are made of (and driven by).

A glance at the action in the major market averages over the past couple of weeks tells the story. From the recent highs, the S&P 500 has pulled back -3.14% as of Friday's close. The Russell 2000 (using IWM as a proxy), which is where all the small-cap companies expected to benefit greatly from the anticipated economic boom, is off -1.83%. And the Dow Jones Industrial Average, which contains some of the value darlings such as Caterpillar (CAT) and Chevron (CVX), is off -3.22% (all of which occurred Thursday and Friday). All in all, not too bad, right?

However, the real action is happening away from the broad market indices. It's the COVID winners - I.E. mega-cap tech which enjoyed huge gains last year - that have been experienced the brunt of the intense selling. For example, the Nasdaq 100 Index is down more than double the S&P (-6.51%) and the ARK Innovations ETF (ARKK), which is a poster child for high-flying names such as Tesla (TSLA), Roku (ROKU), Teladoc (TDOC), and Square (SQ) has plunged -16.75% since 12-Feb. Yikes.

Why The Dive?

Why the dive in what had been the market's star players, you ask? It's a little something called discounted cash flow analysis - and a rotation into cyclicals, of course. According to Investopedia, "Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future."

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should ...

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