The last two times when margin debt reversed
and fell after a record-breaking spike, all hell broke loose. In 2000,
it was simultaneous. In 2007, it was delayed by a few months. Today, on
the surface, everything is still hunky-dory. The Dow is just fractions
below its all-time high that it set on Wednesday. But beneath the surface, parts of the stock market are already coming unglued, and holders of momentum stocks have been eviscerated.
The Nasdaq Biotech Index had beautifully shot
up along an exponential curve. Then the hot air hissed out of it, and
it swooned 21% in six weeks. The index includes big players, like
Biogen, not just startups with big dreams and no drugs. After some
buying on the dip, the index closed on Thursday down “only” 15%. But
that hasn’t saved smaller momentum stocks: Exelixis is down 58% from its
52-week high and 92% from its all-time high shortly after its IPO in
early 2000; Halozyme is down 60% from its high in early January. And so
on.
In the social media space,
the bloodletting has been ugly. The Social Media ETF SOCL is down 23%,
but stronger stocks like Facebook (down 16% from its high a month ago)
paper over individual fiascos, like Twitter, which has plummeted 48%
from its peak last year to below its IPO price.
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