Monday's good news on the COVID-19 front didn't just lead to a huge rally for a large and beaten-down part of the stock market. It reversed a lot of the trends that market participants have seen throughout 2020.
That reversal continued on Tuesday morning, as investors continued to try to figure out the potential consequences of a coronavirus vaccine, as well as the ongoing political wrangling in Washington. Just after 11:30 a.m. EST, the Dow Jones Industrial Average (^DJI -0.11%) was up 172 points to 29,330. However, the S&P 500 (^GSPC 0.02%) fell 11 points to 3,540, and the Nasdaq Composite (^IXIC 0.10%) took an even bigger hit, dropping 139 points to 11,574.
Moreover, several stocks that had become investor favorites during the initial stages of the pandemic have suffered even larger losses. Right now, it's enough to make some wonder whether the bull market in those particular stocks has come to an end -- and how much further they could fall.
Image source: Getty Images.
Looking around the market
You can find several industries where stocks are continuing to reverse course. In the internet retail arena, for instance, Latin American giant MercadoLibre (MELI -1.79%) is down 6% on Tuesday morning, while eBay (EBAY -0.14%) is off 5% and pet specialist Chewy (CHWY -3.27%) has given up 7%.
MercadoLibre also has exposure to electronic payments through its Mercado Pago service, and peers in that industry are also losing further ground. Square (SQ -1.57%) lost 5% early in the session, while Mastercard (MA -0.07%) gave up 2%.
Internet companies in areas like social media and entertainment also gave up ground. Spotify Technology (SPOT -7.28%) saw its stock drop 7%, while high-flying Snapchat parent Snap (SNAP -2.72%) lost nearly 8% on the day.
Even some of the large names in technology are feeling the strain. Chipmakers NVIDIA (NVDA -3.33%) and Advanced Micro Devices (AMD -0.35%) are down roughly 5%, playing a key role in leading the Nasdaq lower.
Traders look for the next hot stock
To understand what's happening, it's important to understand the mentality that most short-term traders have. When you don't anticipate holding a stock for long, it's important to identify popular trends early -- and then make sure not to overstay your welcome. That's what leads to sector rotation, as traders sell their winners and look for what will be tomorrow's top performers.
Because of the market metrics that short-term traders use, these reversals can last a while. It's possible that high-quality stocks can suffer substantial declines -- even as their businesses keep performing well. Pullbacks of 50% or more are far from unheard of.
For long-term investors, that doesn't mean you should look at these pullbacks as a reason to panic or change your strategy. But it does mean that looking for bargain opportunities begins to make sense as traders indiscriminately sell their old favorites -- regardless of each individual company's prospects.
No one can know for certain exactly how far stocks like these will drop before investors start to regain confidence. In the long run, though, these companies have demonstrated a strong ability to take advantage of business opportunities and turn them into success. That's a valuable thing to have on your side -- and long-term investors can appreciate the chance to get into great companies when that end of the stock market is offering them a reasonable price to do so.
