- Big tech stocks started to plunge sharply on Thursday, dragging down the whole stock market.
- Jim Cramer is advising investors to take money off the table as the bubble is bursting.
- Tech stocks are overvalued and were due for a correction.
CNBC’s Jim Cramer is begging new investors to take profits after Thursday’s massive selloff, during which Apple stock fell by 8%. The tech selloff continued on Friday, dragging down the whole stock market.
Tech stocks have been responsible for the massive rally in the U.S. stock market since March bottom. The Nasdaq gained 34% year-to-date before Thursday’s selloff.
On Thursday, the S&P 500’s tech sector posted its biggest one-day loss since March, dropping by almost 6%.
Stock Trading Has Surged During the Pandemic
During the pandemic, a wave of new investors started trading the stock market through platforms like Robinhood. Robinhood is encouraging frequent trading as it doesn’t charge any commission.
Jim Cramer says he’s never seen that much money made so easily and that the rally has undoubtedly made millionaires. But until investors sell their stocks, those gains are only on paper. They could incur huge losses if the market crashes—the risk increases for those who have bought stocks on margin.
I think there’s a lot of stupid money, and the stupid money has made fortunes. God loves them. It’s fantastic. But they have to take something off the table so they’re not going to be poor again. They didn’t do it in 2000.
Investors made big money during the dotcom boom of the 1990s, but the bubble burst in March 2000. Those who didn’t sell their tech stocks before the crash regretted it.
The Stock Market Is Too Concentrated
What we see in the stock market has a resemblance to the dotcom bubble. The trade volume of tech shares has surged. Some tech stocks have also been the subject of speculative bets in the options market.
Charles Schwab’s Liz Ann Sonders comments on the stock market selloff. Watch the video below.
The U.S. stock market is too concentrated in big tech stocks. Five mega-cap stocks (Facebook, Apple, Amazon, Microsoft, and Alphabet) represent more than 20% of the S&P 500 market cap. Those five stocks have driven the rally, but they are leading the crash.
The law of large numbers suggests that it will be increasingly difficult for mega-cap tech stocks to find new growth avenues and if indeed they can, to do so without sacrificing profitability.
The firm released a list of tech stocks that were attractive on a quality and valuation basis. Among large tech stocks, only Microsoft is on the list.
The tech bubble has just started to pop. Robinhood millionaires should follow Jim Cramer’s advice and sell a portion of their tech holdings before losing everything.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The writer owns shares of Microsoft.