Sep 14, 2020 - Economy & Business

Nasdaq's new tug of war: Buy the dip or run for cover

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

Following the fastest 10% correction in the history of the Nasdaq last week — taking just three sessions, surpassing even March's blisteringly fast slide — investors are split on whether it's a buying opportunity or the start of a new bear market.

On one side: Many hedge funds are buying, with fund managers that make both bullish and bearish stock bets buying internet and software companies at the fastest rate in five months last week, according to data compiled by Goldman Sachs.

  • Morgan Stanley data showed its hedge-fund clients also increased their exposure to growth and momentum stocks, which are largely Big Tech companies.

On the other side: Reuters' April Joyner reported Thursday that an "unidentified investor took off around $718 million of notional value in bullish options spreads" in Facebook, Netflix and Adobe stock, and partially closed a similar position in Saleforce previously.

What's happening: It's no longer just speculators, day traders and Robinhooders making moves — traditional buy-and-hold investors will be forced into action by the market's volatility, Jim Bianco, president of Bianco Research, told me on the latest episode of the "Market Banter" podcast.

  • "The market makes long-term moves three times a year now — down 34% in February–March, up 50% from March til September and then the fastest 10% correction in history in the Nasdaq."
  • "We've had two long-term investor moves in this market in the last eight months, maybe we're underway with a third one."

The big picture: The Nasdaq is near valuations last seen during the dot-com bubble and the index is up 58% since its March 23 low, having risen by 76% at its Sept. 2 peak. But many expect the Fed and the government to bail investors out should stocks fall far enough.

  • "There's a new dynamic in the market and that dynamic is the perception that the central bank has your back, the government has your back and they won't allow anything bad to happen," Bianco said.
  • "The decline that we've had to date isn't enough, but if it gets any hairier we expect them to come back in with more kitchen sinks to throw at this market."

The bottom line: "That's why you get this frenzied activity in things like the options market. ... It needs to be factored in to a lot of people's thinking but a lot of people aren't ready to do that."

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