Has the Market Correction Ended?
The key to action this week will be Nvidia earnings, and now valuation bears have Warren Buffett to contend with.
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Although the S&P 500 and other major indexes don’t reflect it, there has recently been significant corrective action in many stocks. A large number of stocks have corrected as much as 40%, but a small number of big-cap names have helped to hide the evidence. Just 10 stocks have accounted for 60% of the S&P 500's gains this year, and those stocks have not faced the recent pressure that other stocks have.
Two groups that illustrate the pain under the surface are data-center and bitcoin-related names. All of Bitcoin's (IBIT) year-to-date gains have been wiped out it and it is trading 25% below its October highs. CoreWeave (CRWV) and IREN (IREN) have dropped 58% and 38%, respectively.
It has been a very uneven market correction, and since the business media focuses primarily on the DJIA and S&P 500, it has not received much attention. The question now is whether the problems under the surface will spill over into the broader market, or whether dip buyers will return to their favorite growth and momentum names to reignite the uptrend.
There was a bounce on Friday, which many bulls hope will lead to a V-shaped recovery. V-shaped bounces have become more common in recent years, but they are not the expected behavior. Typically, after sharp selling like we saw last week, stocks don’t go straight back up. Trapped bulls look for exits into the strength, and bears will reload in anticipation of another rollover. However, if the bounce action does not fade, then FOMO starts to kick in, and that can keep things running higher.
The key to action this week will be earnings due from Nvidia (NVDA) on Wednesday after the close. There is optimism that it will be another solid report, but leading AI name, Palentir (PLTR) , had great results and guidance, but it sold off on the report. The issue was valuation, and that is still a concern for the market.
Still, the valuation bears will now have to contend with Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) , which took a stake in Alphabet (GOOGL) in the third quarter. Buffett is a "value" buyer and not a momentum investor, and it will be tough to argue that there is a bubble if Buffett is willing to buy.
I am cautious about the ability of the market to quickly recover. However, many speculative and small stocks have corrected deeply, and there is some mispricing in various areas that will favor stock pickers. If the market stays under pressure, these stocks won’t bounce back fast, but I’ll be watching for signs of support.
The good news is that corrective action at this point is an ideal setup for seasonal strength to carry the year to the finish. We have signs of a wall of worry, and that would help create a positive dynamic.
We have early positive action, but it is muted so far.
At the time of publication, Rev Shark had no positions in any securities mentioned.
