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There’s no better indicator of market sentiment than the price action in momentum stocks. Tech momentum stocks have been obliterated in the past couple of days. This is nothing new. What’s more important is if they are able to muster a bounce again.
The recent market reaction to tech stocks’ earnings reports can be a concern for bulls. It’s not normal to see 20% one-day drops in large-cap tech leaders like Facebook and Twitter. In a strong bull market, bad news tends to be quickly forgiven. Add to that the lack of enthusiasm about Amazon’s and Google’s huge numbers, and you have plenty of reason to hedge or decrease long market exposure.
Dip buying has been working flawlessly for most of 2018, which explains why the current market is a little bit complacent. While many momentum stocks are getting murdered, the VIX is barely up. VIX tends to rally when the demand for SPY’s put options for protection or speculation skyrockets.