The Nasdaq Composite (NASDAQINDEX:^IXIC) has had a great run, rising to record highs. But at least for a few hours, investors decided to forget about the future promise of many of the companies whose shares trade on Nasdaq stock market and instead weighed their profits. After having been up significantly for much of the day, the Composite and the Nasdaq-100 index fell almost 2%.
To be clear, not all Nasdaq stocks suffered declines. But the majority of the Nasdaq-100 did, and many of the companies that have flown the highest saw big declines seemingly based on nothing more than just fatigue at the pace of their past advances.
Some big declines
There were plenty of stocks that posted sizable one-day drops:
- Zoom Video Communications (NASDAQ:ZM), which has been one of the best-performing stocks in the market so far in 2020, fell almost 6% after having been up more than 2% at points earlier in the day.
- DocuSign (NASDAQ:DOCU), which has seen demand for its electronic signature service soar during the coronavirus pandemic, slumped 9%.
- DexCom (NASDAQ:DXCM) -- maker of continuous glucose monitoring medical devices for diabetes patients -- suffered an 8% drop.
- Data analytics specialist Datadog (NASDAQ:DDOG) sank 10%, just one of many software-as-a-service (SaaS) companies caught up in the downdraft.
For the most part, there wasn't any fundamental news that sent these stocks down, along with the countless others that lost ground on Monday. Instead, it's useful to look the psychology of the market right now for hints to explain the big reversal.
The higher they rise, the harder they fall
In the long run, stocks tend to rise in conjunction with the strength of their underlying businesses. That's why relatively few people have been surprised at the fact that high-flying stocks have been able to defy the coronavirus bear market and gain ground.
Specifically, each of these companies has found tremendous growth opportunities in recent months. Zoom has hundreds of millions of people using its video collaboration platform for the first time in 2020. DocuSign has filled the void created by people not being able to meet in person to sign important legal documents. DexCom's monitoring devices have become even more valuable in helping to keep diabetes patients from having to visit treatment centers for assessments. And Datadog and its SaaS peers have helped to give their enterprise clients the ability to make the most of the information they're collecting while letting workers be productive from remote locations.
What's less clear, though, is whether the size of the stock-price gains in these companies has been warranted. In the short run, what defines how much a stock goes up is popularity among investors and buying demand for its shares. Short-term moves rarely move solely in one direction, with inevitable zigs and zags to keep shareholders on their toes.
Always be ready for volatility
Last but not least, investors who've owned these stocks for a while shouldn't let a day's losses lure them away from their long-term investment strategies. If you still believe that Datadog, DexCom, DocuSign, or Zoom will be an important player and grow in the future, then a significant decline like today's is a better sign that you should think about adding to positions rather than taking away from them. There's no guarantee that the stocks won't lose more ground on Tuesday, later this week, or during the rest of 2020. But if the businesses do well, then these big names and the many strong tech stocks that make up much of the Nasdaq-100 should have further to climb.