"Black Tuesday" for retail investors in the US stock market: Under the pressure of earnings reports and short positions, meme stocks and the crypto world fall together.

Written by: Bao Yilong

Source: Wall Street Watch

For retail investors keen on chasing popular stocks, the overnight U.S. stock market has become the worst trading day since April.

On Tuesday, under the combined impact of Palantir's financial report, bearish bets from well-known short sellers, and turmoil in the cryptocurrency market, stocks and assets previously favored by retail investors experienced a fierce sell-off. The three major U.S. stock indices all fell, with the Nasdaq plunging over 2%.

According to the retail-heavy stock index tracked by Goldman Sachs, the index plummeted by 3.6% that day, approximately three times the decline of the S&P 500 index, marking the largest single-day drop since April 10.

On Tuesday, retail trading enthusiasm did not immediately fade when the U.S. stock market opened. According to data compiled by JPMorgan Chase, as of 11 a.m. New York time on Tuesday, retail investors were still net buying individual stocks and ETFs worth $560 million.

This may be one of the reasons for the market's brief rebound in the early session that day, leading to a narrowing of the S&P 500 index's losses, but the upward trend did not last, and the market turned downward again. Melissa Armo, the CEO of the trader education platform Stock Swoosh, described the movements of the U.S. stock market on Tuesday:

This happens when people start to panic and sell off.

Poor financial reports and the entry of the “big short”

Specifically, two major events directly triggered the sell-off of popular stocks among retail investors. First, Palantir's earnings report raised concerns about its growth prospects.

Wall Street Journal mentioned that Palantir's earnings report shows excellent performance in the third quarter, but the market is skeptical about the sustainability of its high valuation. This year, the retail “darling” has soared over 150%, but it faced a significant drop yesterday, closing down nearly 8% and continuing to decline in after-hours trading.

Palantir's stock price has plunged.

Secondly, the regulatory documents of legendary investor Michael Burry became the last straw that broke the camel's back.

According to a 13F regulatory filing, hedge fund manager Michael Burry, known for the movie “The Big Short,” has established short positions in Palantir and chip giant Nvidia in the last quarter.

Just a few days ago, Burry issued a warning to retail investors about the market's excessive prosperity. The disclosed short position undoubtedly confirms his bearish stance and quickly intensified market panic.

The cryptocurrency market is experiencing intensified selling.

In addition to the direct impact on the stock market, the turmoil in the cryptocurrency sector has also intensified the pressure on retail investors and weighed down stocks related to cryptocurrencies.

Wall Street Journal mentioned that the price of Bitcoin has accelerated its decline, falling below the $100,000 mark for the first time since June, briefly dipping to around $99,932, and falling below the 200-day moving average, marking the second largest single-day drop of the year. Ethereum, ranked second in market capitalization, also plummeted over 10%, falling to around $3,225.

According to coinglass statistics, in the past 24 hours, 342,000 people across the network have been liquidated, with a liquidation amount exceeding 1.3 billion USD, of which long positions account for 85% of the losses.

The recent decline in the cryptocurrency market is not far from the historic liquidity crisis three weeks ago, which caused a market shock that led to the forced liquidation of billions of dollars in cryptocurrency leveraged positions.

Looking ahead, market sentiment remains tense. Melissa Armo stated that she is preparing for another round of declines that may occur on Wednesday. She suggested:

If traders can endure a certain level of pain, they can start preparing a potential stock buying list. If not, I suggest selling.