Here’s one reason the stock market is selling off in the final hour of trade: ‘We’ve shifted from buy the dip to sell the rally,’ says analyst

Thursday’s move appeared to be a head-scratcher for some participants as it seemed likely that the technology-laden Nasdaq Composite might finally finish higher, with momentum buoying the Dow Jones Industrial Average
DJIA,
-1.30%,
and the S&P 500
SPX,
-1.89%
benchmarks and bargain hunters swooping in.

Read: The Nasdaq Composite just logged its 66th correction since 1971. Here’s what history says happens next to the stock market.

However, the advance couldn’t hold and the turnabout in the market was pronounced. The finish left the Nasdaq Composite, which was up over 2.1% at its Thursday peak, with its largest reversal from an intraday high since April 7, 2020, Dow Jones Market Data showed.

The Nasdaq Composite closed down around 1.3% on the session, lurching decidedly lower in the final hour of trade.

Frank Cappelleri, executive director and technical analyst at Instinet, told MarketWatch that there is a simple reason why the market is collapsing.

Check out: Opinion: A bullish sign? Nasdaq investor sentiment is worse now than it was in March 2020

“We’ve shifted from buy the dip, to sell the rip,” he explained, using market slang for a rally.

“Today was a microcosm of what has been happening,” he said, and he cautioned that many areas of the market have still failed to achieve conditions that market technicians describe as oversold, which means that more selling may be in store.

“If we continue to get closes like this, it just tells use that the market isn’t ready to turn higher,” Cappelleri said.

See: At least 7 signs show how the stock market is breaking down

The Instinet analyst said that investors need to look out for a pattern of higher highs and higher lows, wherein we have been in a downtrend marked by lower lows and lower highs. In such an environment, Cappelleri said that it has made sense to sell rallies until the complexion of the market changes.

The equity market has been under siege at least partly because of the prospect of multiple interest-rate increases from the Federal Reserve, which meets Tuesday and Wednesday. Higher rates can have a chilling effect on investments in speculative segments of the market that rely heavily on borrowing, with investors discounting future cash flows. Talk of inflation also has put a damper on the market and is one of the key reasons compelling the Fed to change from a regime of easy-money to one of policy tightening.

Buyers have tried to rotate into sectors that are expected to perform better in the coming year, such as financials and energy, but the rotation has been uneven and marked by bouts of turbulence.  

See: Stock-market warning signal: Here’s what surging bond yields say about S&P 500 returns in next 6 months

A rapid rise in Treasury yields also has hastened the rotation and helped to stoke further volatility in stocks. The 10-year Treasury
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1.762%
was mostly placid on Thursday but expectations are for a further rise in short-term and longer-term debt.