InvestIdeas

“The bottom line is that this correction was long overdue and likely has more downside over the next few weeks [and] months as these positions are cleared out,'' Morgan Stanley analysts wrote.

“These stocks just got bought up to the point where even the most optimistic of forward [earnings] estimates won't be enough to justify these valuations,'' said Sam Stovall, chief investment strategist at CFRA.

“We think there is more downside over next month, but (it) eventually leads to further broadening out of the bull market,'' the analysts wrote. “It's true that valuations have surged, but this is typical early in a recovery.''

The biggest question is whether this blowing off steam for tech stocks will remain just that _ a return to sanity for an hugely overbought area of the market _ or whether it will drag the rest of the market down with it.

``This is a good reminder that if it feels too good to be true, it probably is,'' Stovall said.

What has happened can be categorized as a correction to prevailing froth rather than a full-blown reordering of sentiment.

To wit: even with a decline of almost 7% over five sessions through Thursday, the S&P 500 managed to hold firm above its 50-day moving average, a feat not seen since 1934.

Similarly, for the first time since the dot-com era, the Nasdaq 100 suffered a 10% correction within a week without breaching its 100-day average.

A consensus holds that with earnings sentiment improving and the Federal Reserve expected to stick to its dovish stance, this rout remains more of a hiccup than a life-threatening event.

“I don’t think this is the end of the bull market especially when you consider earnings revisions are looking positive, the economy seems to be faring OK, and easy money. I could see some downturns along the way but for the most part I don’t think it will be the end.”

In the options market, confidence and/or complacency persists. The Cboe put-call ratio’s 10--day average hovered near a 20-year low of 0.4 in late August. While the measure has climbed to 0.6, it trailed the historic average of 0.6, a sign that bullish bets are still elevated relative to bearish wagers.

“Some of the catalysts that we’ve seen for the last five months still remain in place. You have monetary and fiscal policy, you have a low interest rate environment. Those still set up well for equities”.