Have Growth Stocks Bottomed?
Throughout much of the year, but particularly since March, several heavily owned growth stocks have been trending downwards. Some of these include:
- Mastercard (NYSE:MA), which is down 11 percent for the year.
- Starbucks (NASDAQ:SBUX), which is down 11 percent for the year.
- Amazon (NASDAQ:AMZN), which is down 19 percent for the year.
- Biogen Idec (NASDAQ:BIIB), which is down 17 percent in the past month.
These stocks rose unabated last year, and it should come as no surprise that they are correcting. Late last week, however, these high fliers turned around and began to move upwards once again. This begs the question — is it time to get back into these large-cap growth stocks again, or is there further downside? While the corrections we have seen have been more substantial than the norm for the past couple of years, I still think that they are going to continue in most of these cases. I cite the following reasons.
First, in a bull market, it is not uncommon for quite large corrections to take place. For instance, Apple (NASDAQ:AAPL) shares traded from $180/share in 2007 to $75/share in 2009 before flying to $700/share. The price of gold fell from about $200/ounce in 1974 to about $100/ounce in 1976 before spiking to over $800/ounce.
The reason for this is that when asset prices begin to move up, a lot of traders become involved, and they drive prices even higher. They don’t buy assets because they believe in the fundamental cases for owning them; rather, they buy them because they expect to be able to sell them at higher prices. Thus, when the uptrend turns against them, they are forced in a position where they have to sell. This, in turn, creates negative momentum, which entices traders to sell these assets short until they reach an extreme on the low end.
So, for example, as Amazon shares have moved up several hundred percentage points in the past few years, many traders bought the stock who wanted to ride the uptrend. Now that this trend has stopped, they have no reason to own the stock, and they will likely sell into strength. Once these traders have finally exited the market those left holding the stock are those who believe in its longer term value, and the stock will stop going down.