Trade on Thursday was wild, and frankly, not great for bulls. We have been writing about the precarious position for bulls since November 17, when the S&P 500 closed below its 50-day moving average at 6,710. We wrote then that the odds were good for a test of 6,550, the October 10 low.
A reversal of this magnitude is inherently bearish. On Thursday, the S&P first tasted hope, surging to retake the 50-day moving average on better-than-expected Nvidia earnings. It felt like the year-end rally was finally kicking off. But by the close, that optimism was crushed. A 1.9% advance was completely wiped out, the index plunging to close at 6,538.
The why isn’t significant. Bears will tell you that investors are finally waking up to the problems with valuations, fiscal debt, and inflation. Yeah, that isn’t it. The stock market is not efficient; it is driven by narratives. Sadly, these storylines don’t even have to be true. In fact, low-information stories often work far better than informed opinions.
Remember when DeepSeek, a Chinese large language model, collapsed global tech stock valuations? The big idea was that the highly efficient LLM negated the need for massive data center buildouts, millions of new high-end AI clusters, and new power supplies. Despite the protests of actual experts who argued the opposite, the low-information narrative gained traction.
One by one, bearish investors stepped into the financial media spotlight. They talked about how DeepSeek changed AI forever and that most of the stock gains were built on hype. This was/is nonsense, but that is not the point.
Narratives drive stock prices.
If you are an investor in high-growth stocks, you must be prepared for volatility. It is going to happen.
If you are trading, you must respect price. It doesn’t matter what you think about the narratives driving prices. The stock market owes you nothing. If you are wrong, you must have an exit plan, and complaining is not it. But let’s get back to Thursday and the wild reversal.
Professional money managers are getting killed this year by the S&P 500, an unmanaged index. Only 22% of actively managed portfolios are beating the benchmark. We assumed, like most, that pros would be forced to chase performance into the end of 2025 by buying the biggest stocks in the S&P 500. On November 17, the calculus flipped.
If the S&P falls back into year-end, pros could be saved. For this to happen, the biggest stocks in the index need to fall. This isn’t a conspiracy theory, but underperforming pros could facilitate that decline by simply not buying the dips. When the S&P 500 was above its 50-day moving average, they felt compelled to buy dips.
The lesson from Thursday is simple: The market’s narrative has shifted, and the technical support bulls previously relied on has been tested and broken. We are now entering a phase where the absence of buying may prove just as powerful as organized selling. Investors should look for compelling lower levels to buy their favorite stocks. Traders should stay nimble and sell rallies.