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Why the stock market just got clobbered

A convergence of factors joined forces on Wednesday to scare the bull thesis in stocks and really club the market into the ground.

Losses on the Dow Jones Industrial Average (2.2%), Nasdaq Composite (2.7%) and S&P 500 (2.6%) all accelerated into the close. The selloffs marked the biggest plunges for the major indexes since October, notes Yahoo Finance markets reporter Jared Blikre.

The session was wobbly out of the gate Wednesday, but experts point to two things in particular for the hearty levels of profit-taking by the closing bell.

First, the dour mood quickly spread on Wall Street after the latest Federal Reserve meeting and press conference by Chair Jerome Powell. Traders locked in on key changes in the FOMC statement, which collectively called into question the timing of the economic recovery from the COVID-19 pandemic.

“The FOMC’s assessment of the economic situation downshifted,” said Wells Fargo strategist Zachary Griffiths. “The Fed acknowledged the recent downshift in economic activity amid a worsening public health situation in its policy statement, commenting, “the pace of the recovery in economic activity and employment has moderated in recent months.”

Recall for most of December and into the initial part of January, stocks have been aggressively bid up on the hope of a V-shaped economic recovery later this year as people received COVID-19 vaccines and another dose of fiscal stimulus. In fact, it was this thesis that unleashed Wall Street’s reflation trade. Shares in those reflation trades such as Disney, Boeing and Goldman Sachs were among the biggest Dow losers in Wednesday’s session.

Unfortunately for the bulls, that upbeat reflationary action looks to be dead in the water for now thanks in part by the Fed’s commentary.

The other component to the rout is likely none other than the absurdity unfolding in super speculative stocks.

A rush of retail investors taking on Wall Street short sellers in Reddit chat rooms continue to send shares of fundamentally weak, heavily shorted companies through the roof. Shares of AMC exploded 300% by the close of trading. Its stock is up 552% over the past five sessions. GameStop shares spiked another 134%, taking its five-day gain to 766%. Koss Corporation saw its stock skyrocket 480% — it’s now up 1,358% in five days.

“Maybe some margin calls — I don’t see anything beyond that — but when stocks move this much, someone is getting hurt,” remarked one veteran strategist to Yahoo Finance.

The bewildering gains in the aforementioned companies — and others like them — have many on Wall Street wondering if the market hit a short-term top late last week or earlier this week. Such rampant, euphoric behavior in these types of stocks have many times in the past been followed by large plunges in the broader market.

“Yes, things have ramped up on the risk side. It doesn’t pass the smell test with a lot of Wall Street bets,” RBC Capital Markets head of U.S. equity strategy Lori Calvasina told Yahoo Finance Live.

Morgan Stanley strategist Andrew Slimmon agrees: “I think this is a sign that we are getting to a top and we are going to get a pullback. That’s just one of the signs.”

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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