Editor’s note: This article was first published in July 2014; Jeffrey Saut’s forecast, the intraday share price falls and eDreams’ loss since its IPO are figures from 8 July 2014. Zulily, LinkedIn and Twitter have since been taken over or delisted.
Just as good weather is usually appreciated more after a storm, on the stock market investors tend to buy in with more peace of mind after a severe correction. It is a correction we have been expecting for a long time and that still has not come, at the risk of another bubble taking shape, above all in the share prices of the big tech companies.
Some research firms are talking about a 20% correction, while Jeffrey Saut, chief investment strategist at Raymond James, says that on the face of it the market looks as if it is getting ready for a 10%–12% correction. He compares the situation with summer 2011, when markets saw an 18% correction.
Saut thinks it will not be that severe this time, but that a correction of 10% or a little more is needed to calm fears of a bubble. Most investors and research firms already know that at current prices they will not find bargains, and there is certainly no margin of safety when buying in. That means investing in stocks is starting to carry more risk than potential reward.
The report came out yesterday, 7 July
Curiously, the report that talks about the need for a correction and an imminent blow to the markets was dated yesterday, and today the markets are suffering a rout.
Among the hardest hit are the leading social media companies, such as Twitter (-7.41%), Facebook (-4.10%) and LinkedIn (-7.10%). There are also steep falls in FireEye (-8%), Zulily (-8.3%) and Yelp (-7.5%).
The Nasdaq, probably one of the indices that would be hit hardest if the scenario described in the report came about, is down 1.65% at the moment.
The Spanish market has also taken a severe beating: the IBEX 35 has lost 1.83%, with IAG, Sacyr, CaixaBank, Acciona and Gamesa leading the losses at between -4.60% and -7%.
But the big loser is eDreams, with a further fall of 14%. The company has now lost more than 50% of its value since its recent stock market debut.
And we should remember that many of those “silly indicators” are flashing warning signs.
Featured image: ajay_suresh, CC BY 2.0, via Wikimedia Commons.
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