US stocks fell sharply on Wednesday on disappointing earnings as concerns over increased speculative trading activity deepened.
The Dow Jones Industrial Average lost 620 points, or 2%, while the S&P 500 fell 2.6%. The tech-heavy Nasdaq Composite was down 2.5%. The S&P 500 and Nasdaq both hit intraday record highs in the previous session.
Boeing fell more than 4% after its earnings report showed its 2020 net loss hit a record $ 11.9 billion from the 737 Max grounding and coronavirus pandemic. AMD shares fell more than 7% even after the chipmaker posted sales and profits that exceeded Wall Street’s already high expectations.
The intensification of speculative behavior among private investors is cause for concern. Heavily truncated names, including GameStop and AMC Entertainment, were pushed further up by amateur day traders in online chat rooms. Some investors are concerned about mounting losses from hedge funds spilling over to other areas of the market as these funds sell other securities to raise cash. Investors are also concerned that the speculative behavior is a sign that the market is overvalued and a retreat is near.
“We’ve run so much and it’s healthy profit-taking,” said John Davi, founder and CIO of Astoria Portfolio Advisors. “There has been an enormous market collapse in the last two months. If the market rises parabolically, you will see many investors speculative.”
GameStop shares exploded again, more than doubling on Wednesday. CNBC learned that Melvin Capital, the hedge fund targeted by Reddit’s retail investors, had sold out its short position. According to CNBC’s David Faber, more hedge funds have suffered large losses due to their short positions.
“Market participants have been watching the GME phenomena with curiosity and amusement, but the day-long surge is undermining market confidence and creating a positioning fault,” said Adam Crisafulli, founder of Vital Knowledge, in a note.
AMC gained more than 300% on Wednesday.
TD Ameritrade announced Wednesday lunchtime that certain transactions with GameStop and AMC have been restricted “in the interests of reducing the risk to our company and our customers”.
Stocks fell as “spikes in sharply shortened stocks like GME and others.” [is] Creating significant margins requires funds to close these positions, “FundStrat’s Tom Lee said in an email. This” forced sale “by hedge funds is causing some turmoil in the markets and is likely to keep all active managers in Advised a risk-off mode, Lee said. A margin call is when a broker tells an investor to hold more cash to cover losses.
The strategist added that Wednesday’s sell-off was temporary and stocks would soon resume their rally.
The Cboe Volatility Index, known as the VIX or Wall Street’s Fear Measure, surged above 30 on Wednesday and hit its highest level since December.
“The Big Short” investor Michael Burry said in a now-deleted tweet on Tuesday that trading GameStop was “unnatural, crazy and dangerous” and should have “legal and regulatory implications”.
Wednesday’s market decline followed a strong rally in records amid optimism about a smooth vaccine rollout and additional fiscal stimulus. The S&P 500 ended last year with consecutive monthly gains, bringing the return for 2020 over 16%.
Microsoft rose slightly after reporting a stellar quarter. Revenue increased 17% year over year in the second quarter of the fiscal year as the cloud business accelerated.
Starbucks beat earnings estimates for the last quarter, but U.S. sales in the same store declined 5% due to rising cases of Covid-19. The coffee chain’s shares fell more than 5%.
Apple, Facebook and Tesla will report profits after the closing bell. They represent three of the six largest companies by market capitalization in the United States, which means that fluctuations in their share prices have an outsized impact on the performance of the broader S&P 500.
The Federal Reserve kept interest rates unchanged near zero on Wednesday while maintaining an asset purchase program with monthly purchases of at least $ 120 billion.