Investors May Be Too Optimistic. The Stock Market Drop Could Just Be Getting Started.

Investors May Be Too Optimistic. The Stock Market Drop Could Just Be Getting Started.

Investors have been too optimistic about the stock market—and they’re starting to pay the price.

Heading into this past week, signs of optimism were everywhere. Bulls outnumbered bears in a recent American Association of Individual Investors poll by more than 20 percentage points, while Wall Street strategists at firms like UBS, BMO, and Morgan Stanley were busy raising their price targets. And why shouldn’t they? The

S&P 500 index

has gained 26% since bottoming in late October.

But markets can get too optimistic, and that just might be the case now, according to Renaissance Macro Research’s Jeff deGraaf. He notes that a recent Investors Intelligence survey had put the number of bulls at 60%, even though the S&P 500 had risen about 5% over the previous 13 weeks, a gain more consistent with a reading below 50%. “Wouldn’t you know it, returns tend to be below average (not negative) when bulls are excessive to historical returns,” he writes.

Of particular concern are fund managers, who have just 4% of their portfolios in cash, according to a Bank of America survey. That’s the lowest level in three months, and anything below 4% is a sell signal, BofA says. Anecdotally, fund managers are already starting to get more careful. Ken Mahoney of Mahoney Asset Management, for one, says he’s holding on to much of his remaining cash “because we just had some great runs [in stocks],” adding that he’s waiting for lower stock prices before buying more.

That type of hesitation could leave stocks with a dearth of buyers and put them in a vulnerable spot. Weakness is already creeping in—the S&P 500 was on pace to drop 1.2% this past week, while the

Dow Jones Industrial Average

was declining 2.3% and the

Nasdaq Composite

falling 1.1%—but most dips this year have been of the mild variety, ending with higher lows and leading to higher highs.

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Still, early signs that the market will crack are cropping up. For one, the market isn’t reacting positively to good or bad news. On Tuesday, the S&P 500 finished little changed even after consumer confidence rose more than expected, and it declined 0.6% on Thursday even after the Bureau of Economic Analysis revised first-quarter U.S. gross-domestic-product growth down to 1.3% from 1.6%. That’s a sign that the market is looking increasingly fragile.

Fragility could soon turn into a nasty slide if


stock pauses its run-up. The company is worth $2.72 trillion, just over 6% of the S&P 500’s market value, and a drop would pull the index downward. It would also drag other chip stocks lower, putting even more pressure on the index, especially if nontech stocks don’t pick up the slack. Substantial declines in Nvidia shares are inevitable; it has had multiple double-digit drops even as its stock has risen almost 200% over the past year.

“Nvidia is sucking up all the oxygen in the room,” says Steve Sosnick, chief strategist at Interactive Brokers.

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It might be time to suck it up and take some money off the table.

Corrections & Amplifications

Nvidia’s market capitalization is $2.72 trillion. An earlier version of this column incorrectly gave the figure as $2.72 billion.

Write to Jacob Sonenshine at

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