The stock market has been volatile lately, and the Nasdaq Composite (^IXIC +1.22%) has gone somewhat out of favor. That trend continued on Wednesday. While the stock market benchmarks better geared toward old-economy stocks were flat to higher on the day, the Nasdaq was down nearly 2% at 2 p.m. EST.
It might be hard to understand why many of the high-growth stocks that produced the Nasdaq's superior performance in 2020 would suddenly diverge from the rest of the market and head lower. Yet market rotation is something investors often do over the course of a market cycle, and that seems to be motivating the big declines in some key growth stocks -- stocks that could suddenly start looking like bargains.
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Rotation has hit the Nasdaq hard
If all you look at is the Nasdaq, it appears that the stock market is going through a full-blown correction. The index is down almost 8% from its all-time highs just a couple weeks ago.
Many top performers are down more than that. Tesla (TSLA +3.20%), for instance, has fallen 18%. Zoom Video Communications (ZM 1.09%) has suffered a more than 20% decline. And Peloton Interactive (PTON 0.27%) has seen its share price lose nearly 30%.
For some companies, news of ongoing progress in fighting the COVID-19 pandemic has led to investors losing faith in their pace of future growth. Zoom and Peloton both saw sales soar in their most recent financial reports, but the fear is that post-pandemic reopening will cause their businesses to suffer.
Here's what's rising while the Nasdaq falls
When you look elsewhere, though, the stock market isn't going through anything like this big of a correction. The Dow is actually up as of Wednesday afternoon, and it's only lost about 2% from its all-time highs.
That suggests that the market is going through a rotation rather than a true downturn. It also leaves the obvious follow-up question: What's rising as major Nasdaq stocks are falling?
The answer lies in sectors that the Nasdaq tends largely to ignore. Financial stocks have done exceptionally well, with Wells Fargo (WFC 1.44%) posting a 15% gain over the same period since mid-February. Oil stocks are crushing the market, as both ExxonMobil (XOM 0.50%) and Chevron (CVX 0.02%) are up 14%.
Momentum works both ways
Many market watchers have attributed the Nasdaq's huge gains over the past year to momentum investors. As stocks have moved higher, they've attracted the interest of more investors, who in turn create more buying pressure. That positive feedback loop contributed to the rises in these stocks.
However, when momentum investors see hot stocks lose momentum, they move on. Now, the stocks that momentum investors see making the most sense are the recent winners in financials and energy. Interest rate trends are also boosting the prospects for financial businesses, as higher long-term rates could make lending and other leverage-based financial strategies more profitable.
Time to start shopping
In the long run, stocks perform in line with their businesses. Therefore, as long as the big winners in the Nasdaq over the past year continue to see growth, then they'll eventually recover from these recent declines and move higher. That won't happen with all of the high-flying stocks in the Nasdaq, but it will help the best companies.
During market rotations like this, however, investors often throw out good stocks along with the bad. That means that some great companies could well see a big sale soon. Smart investors are starting to think about how they can best take advantage -- and you should too.
