Stocks got speed checked

The stock market is facing a bit of a speed check.

That’s the message emanating from various key actors and assets, communicated in ways that range from subtle subtext, to somewhat fuzzy, to the extremely explicit.

Palantir was sold hard, falling 8% yesterday, on what are objectively good quarterly results: its ninth consecutive earnings beat and a boost to its Q4 guidance. The difficulty is, no matter how strong any results are, Palantir is always at risk of a “sell the news” event because of how darn expensive the shares are.

We saw something similar — a sell-off despite very good financials — in the wake of Micron’s earnings report in late September. And bitcoin, another “id” asset, was down over 5% yesterday.

The CEOs of Goldman Sachs and Morgan Stanley gave some vague warnings about the potential for a material drawdown in the stock market at an unspecified point in the future.

The VanEck Semiconductor ETF saw a broad sell-off, finishing the day down 3.8%.

A retail favorite failing to build on momentum even when it “deserves” to, the heads of banks warning of a pullback, and the most important part of the stock market being told it’s overheating, along with a filing showing that prominent short seller Michael Burry has bet that Nvidia and Palantir will tumble.

In and of themselves, any single one of these events probably doesn’t equal the S&P 500 being down over 1% on Tuesday. Collectively, under different circumstances, they might not be sufficiently potent for a sell-off of this nature. But the likes of Cboe and Goldman Sachs were flagging signs from the options market that traders were becoming perhaps a little overenthusiastic in their positioning.

The Takeaway

If you go over a speed bump while driving 100 miles per hour, there’s an extremely high risk of damage to the car even though the obstacle itself isn’t that daunting. Similarly, relatively inconsequential catalysts can cause more market damage at times when exuberance has started to creep in.