After last week's sizable stock market downdraft, which crushed the Nasdaq's priciest and riskiest names the most, investors will be watching to see if the bleeding stops when trading resumes Monday -- or if the pain spreads in a more significant way to the market's blue chips.
There's one big difference between the current pullback and the steep drop to start the year: The losses this time are concentrated in pockets of the market deemed speculative, such as technology, biotech and small-company stocks.
The Nasdaq, home to many former high-fliers, has plunged 8.2% since its March 5 high, vs. a 5.8% drop during its early-year dive that ended Feb 3. The blue chip Dow Jones industrial average, which fell 7.3% at the start of 2014 before rallying back within 4 points of its record close, is down 3.3% in the current funk.
"The more conservative names have been holding up well, and the more aggressive names are in a bear market," says Patrick Adams, a portfolio manager at PVG Asset Management.
The upshot: Investors with less-aggressive and more-diversified portfolios haven't suffered portfolio-crippling losses, at least not yet.
The most pain has been inflicted on popular stocks that shot up the most in 2013 and earlier this year, only to flame out as the "momentum" trade reversed.
The iShares Nasdaq Biotechnology ETF is in bear-market territory, defined as a drop of 20%, after plunging 22% since its late-February peak. The recent slide has also trimmed the value of video-streaming service Netflix's shares by 29% and shaved 20% off social media darling Facebook's shares.
The early-year pullback was sparked by turbulence in emerging markets and the initial shock over the Federal Reserve's move to reduce its market-friendly stimulus. The current rout is being driven by investors exiting a slice of the market that's been riding high on momentum buying that drove prices to frothy levels akin to bubble-type valuations in 2000.
The ingredients! for a broader market correction are in place, Adams warns.
"We have not seen broad-based selling yet, but we will," he says, adding that he thinks a "slow-moving top is forming" and that a full-fledged bear market is coming.
Corporate earnings growth has stalled, says a bearish Adams. Investors are becoming more risk averse as the aging bull pushes deeper into its fifth year. The shift in Fed policy to less stimulus represents a new headwind. The later stages of the market's run to record highs, he adds, smacks of speculation and hasn't been backed by good enough readings on the economy or earnings.
Investors get fresh readings this week on retail sales, manufacturing and housing, as well as profit reports from 54 S&P 500 companies.
"The market sucked everyone in last year," says Adams. "I don't think it will let investors out without punishing them."
Optimists, like Dan Chung, CEO and chief investment officer at Fred Alger Management, insist the broad market is holding up just fine, and that the market dip has created money-making opportunities.
"Given how sizable the sell-off has been in high-growth areas, the S&P 500's (small loss) shows remarkable strength," says Chung. "It reinforces the thesis that dips should be bought."
Working in the bulls' favor, Chung adds, is the fact that many key warning flags that point to a bigger downturn are absent. The S&P 500 is currently trading at a price-to-earnings ratio below levels seen at prior bull-market peaks. Long-term interest rates are also far below levels typically present at market tops.
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