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Tech Selloff Is Far From Over, Warns Morgan Stanley

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Tech Selloff Is Far From Over, Warns Morgan Stanley

Morgan Stanley Chief U.S. Equity Strategist Mike Wilson has warned that selloff in U.S. equities isn't over yet, reports Bloomberg.

What Happened: Last month, Wilson had called the peak in S&P 500 after the massive rally, which led to a lopsided market. "We expect a growth scare to be followed by a rate scare over the next weeks/months that could finally give us the first tradable correction in the major U.S. equity indexes. It could begin imminently," he wrote in a note to clients.

Nasdaq 100 is down 13% from its Sept. 2 high, falling below its 50-day average and underperforming the S&P 500 for the first time in a year.

The historic rally has led to a positive sentiment bubble in the last few months led by tech, and the selloff hasn't cleared the bubble yet.

Nasdaq 100 is at the risk of falling to its 200-day average level of 9,258, implying a 12% drop from current levels, according to Wilson.

"This is what happens when stocks get so extended - corrections can be much bigger when remaining in an uptrend," wrote Wilson.

Why It's Important: The biggest tech ETF, PowerShares QQQ Trust (NASDAQ: QQQ), lost money at the fastest rate in two decades on Friday, and large speculators boosted the net bearish positions in Nasdaq futures to a 12-year high, according to Bloomberg.

Hedge funds have stayed decidedly long tech and growth stocks due to the outsized returns of internet and software companies, but this also highlights the danger — should the sentiment start to sour, Wilson said.
As many funds are letting the money ride, it may be fuel for the "correction to go a little further than most are expecting," he wrote.
 

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