The form that speculation has taken may have contributed to the fragility of the market.
In recent months, investors have bought large amounts of a financial instrument that allows them to invest in stock prices without investing as much money as when buying actual stocks. Analysts say that the increased use of these instruments, known as options, helped push technical stocks to new heights.
The Financial Times reported on Friday that SoftBank, a Japanese conglomerate that has a history of making large, risky investments, had been a major buyer of options related to rising technical stocks. SoftBank declined to comment to The New York Times.
As a result, technical stocks continued to move higher, convincing investors that they were a safe bet. “People became too confident,” Maley said. “It was a kind of situation that can not lose.”
The question now is whether falling prices can lead to investors who optionally wind up their efforts and give more sales. Since the shares in Amazon, Alphabet, Microsoft, Apple and Facebook have accounted for a large share of the stock market’s gains this year, a route in the shares can pull the market everywhere.
Equities may be more prone to a slump if investors perceive them as overvalued. On a scale known as price / earnings ratio, which compares the share price with the company’s profits, the stock market looks expensive. Together, the companies in the S&P 500 index trade at a price / earnings ratio that is well above the average for the last 30 years, Paulsen said.
The appearance of overestimation has occurred before, he noted when earnings were depressed by a weak economy. And instead of falling into a prolonged decline, stocks went up. “I think it’s going to happen here,” Paulsen said.
But other analysts believe there are many more problems ahead.
“The market is cracking under the weight of its own unpleasant complacency, overestimation and market concentration,” said Rosenberg, an economist and strategist.