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Biggest Tech Stock Drop since 2011 - Will the Dow Hit 15,000?

October 11, 2018 11:30

Biggest Tech Stock Drop Since 2011

October 10th saw the Dow Jones Industrial Average fall by 831 points and the Standard & Poor's 500 index tumbled by 4.85%, with the US's biggest tech stocks being the hardest hit.

Some of the biggest falls include:

So why did this happen? And, more importantly, how can traders take advantage of this movement?

Why Did the Markets Fall?

After a positive trend that ran for more than three months, following a decade-long bull market, many investors were surprised by the sudden trend - especially since it was just a week after the Dow Jones hit a record high. First, the 10-year Treasury note, whose key rate influences the pricing of nearly every financial asset, hit 3.24% for the first time since May 2011. This follows the strongest economic quarter in the US in four years and the lowest unemployment rate in nearly 50 years. While the economy is moving in the right direction, the increase in interest rates has a two-fold effect on the market. The first is that bonds will pay a higher return to investors, which makes stocks less attractive as an investment. The second is that consumer and business purchasing power declines, which can slow the economy as a whole.

Why Were Tech Stocks Hit So Hard?

Beyond rising interest rates, it's also worth considering why tech stocks in particular were hit. In recent months, both Apple and Amazon have reached market capitalisations of USD1 trillion. However, investors were beginning to doubt whether their shares could continue to climb. Rising interest rates were a factor, but so was anxiety about the trade war with China, as well as increased regulatory scrutiny facing these companies. Some commentators (including Donald Trump) have also asked whether this could be the beginning of a market correction - could the sell-off become a decline of 10% (or more) from the market's peak in January?

Could the Dow Hit 15,000?

The 831 point drop was the third largest one-day Dow drop in history, causing some investors to question whether the index could fall to 15,000, in line with its resistance points in 1999 and 2007, before the global financial crisis. At both of these points, the index hovered between 16,000 and 17,300 at its peaks, before bottoming out a 8,390 in 2009.

So is it possible that the Dow would hit 15,000?

While it is possible, the truth is that it would be unlikely for the index to drop that far in 2018. If it does continue to fall, it will most likely hit support around 19,000, the previous 2014 resistance point.

How Traders Can Take Advantage of This Volatility

Volatility can provide many opportunities for the savvy trader - both when markets climb and fall. With share CFDs or index CFDs, a trader could have taken advantage of yesterday's market movements by opening a short trade on any of the indices or tech stocks that were affected. For instance, had a trader opened a short trade on 100 lots of our Twitter CFD (#TWTR) on October 9 at 10pm USD29.51 and closed it at the low of 27.16 on October 10, their profit would have been USD235, or EUR204.

Twitter CFD Graph

Source: #TWTR CFD price chart - Admiral Markets MetaTrader - Accessed October 11, 2018, 12:30pm EET.

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