A Crash, Condensed (So Far)
The Weekend Edition is pulled from the daily Stansberry Digest.
AI stocks plummeted on Thursday...
We've been watching the AI trade weaken over the past few weeks. And two days ago, it took its deepest dive yet.
Shares connected to the chip industry and data centers opened lower, and the losses accelerated throughout the morning – sparing few companies along the way. The PHLX Semiconductor Index ("SOX") was down about 12%.
The CBOE Volatility Index ("VIX") – considered by some to be the market's "fear gauge" – rose 70% in just one day.
Wednesday's post-election rally was gone by lunch, and then the selling became market-wide, which is different from what we've seen lately. Sectors like consumer staples, energy, and healthcare – which were higher in the morning – ended up down.
Overall, the Dow Jones Industrial Average lost 3.5% and had its worst second trading day after a midterm election going back to 1896.
Only about 70 of the S&P 500 Index stocks were higher on Thursday. Overall, the U.S. benchmark index lost 4.3%. The tech-heavy Nasdaq Composite Index dropped 5.5%. And fewer than 10% of the small-cap Russell 2000 Index saw gains.
It all comes on the heels of Tuesday night's "blue wave" midterm results.
Investors appear to be worried the AI-infrastructure build-out could grind to a halt once a new Democratic Congress is seated in January, and that such a slowdown could threaten the payoff of the entire AI boom.
A dot-com-style crash, in condensed form...
We saw "rotation" out of the biggest winners of the AI boom on Thursday. Some other sectors held up much better. But nothing was really spared.
The action is eerily reminiscent of the dot-com bust 25 years ago... only squeezed into a single trading day.
The popular tech stocks of the 1990s were hurt most in the early stages of the bust in 2000, while other sectors held up well initially before getting caught up from 2001 to 2003.
Meanwhile, Thursday started more like another AI-exclusive sell-off, but it didn't end like one. Rather, around midday, it began turning into an "everything is down" day like we see during fully bearish times in the market – and what happened at the end of the dot-com bust.
So, if nothing else, what we've seen over the past week or so in the markets constitutes a form of an AI crash. The question now is how far it can go...
Given the intense selling and fear we just saw in the market, I wouldn't be surprised to see a short-term low here.
The Next Few Days Will Be Telling
As DailyWealth Trader editor Chris Igou wrote Wednesday, tech stocks have dropped toward "oversold" levels. Similar declines have marked near-term bottoms seven times in the past four years during the AI-driven bull market.
And for the first time since April, the Nasdaq-100 dropped under its 200-day moving average (200-DMA) on Thursday. The 200-DMA is a long-term technical trend, and technical traders often see it as a level of "support." Falling past that level is a concerning sign... but also not a surefire signal of more pain to come.
This spring, tech stocks rallied back from below their 200-DMA. They did the same in the spring of 2025 in the wake of "Liberation Day" sell-offs.
In any case, we're not surprised to see a sell-off in just about everything touching AI after years of a blistering bull run. But thus far, when we've seen corrections during this stretch, the market has rebounded.
The risks in a heavily AI-concentrated market are becoming widely apparent today...
As we wrote in Monday's Digest...
If most of your investments sit in an S&P 500 index fund, just know that about 40% of it rides on the 10 largest companies – mostly the AI names... Even if this current moment marks a short-term low for these stocks, there could be more pain ahead...
You may want to consider spreading some of that money out, whether through an equal-weight fund or into the kinds of sectors that held up during the first part of the dot-com-bust rotation – like healthcare, energy, and consumer staples.
Even after the recent drop, healthcare and energy are up roughly 13% and 8%, respectively, over the past three months, making them the best-performing major sectors of the S&P 500. Consumer staples are up more than 7%.
Meanwhile, tech stocks are down 12%, and communication-services stocks – which were also among the biggest losers of the dot-com bust – are down more than 5%.
The rhyming with the dot-com days is too much to ignore.
But like I said, the pessimism on the AI trade may be getting a touch overdone, at least in the short term. If the selling cools in the days ahead, it could set up a near-term bounce.
That's not just a hunch. It's an observation backed by market history...
A Familiar Market Pattern May Be Pointing to Better Days Ahead
This has – more or less – happened before...
Political cycles tend to move markets in the short term on knee-jerk reactions to who controls Congress or the White House. Still, some patterns are predictable...
One is uncertainty and volatility in midterm years, followed by much stronger times in Year 3 of the presidential cycle (which we're just about to enter).
Brett Eversole wrote about this pattern in a recent issue of DailyWealth...
Stock returns have formed a historical pattern based on the specific year of a president's term.
The first year tends to be good. The second year is terrible. The third year is great. And the fourth year is good again. The differences are even more pronounced if we use the government's fiscal year, ending on September 30, instead of a typical calendar year.
Here are the returns of each year in the election cycle since 1928, using that method...
Jeff Hirsch, editor of the Stock Trader's Almanac and former guest on the Stansberry Investor Hour, has tracked this cycle for decades. He calls the stretch from the fourth quarter of a midterm year through the second quarter of the following year the "sweet spot."
According to the Almanac, the S&P 500 has averaged a roughly 20% gain over those three quarters, and the Nasdaq has risen almost 30% on average. Weakness tends to come before that window opens. Down days like we saw on Thursday have ended up being part of the pattern.
What to watch for next...
Our colleague Greg Diamond, editor of Ten Stock Trader, has studied the same setup going back further – all 32 midterm elections since 1902.
Again and again, he has found choppy trading heading into the vote, followed by a rally once the results are in.
As for what could decide whether that rally shows up this time, Greg pointed subscribers to one key tell today: the market's reaction to Nvidia's earnings in less than two weeks.
A lot of the trouble began when the "hyperscaler" tech giants began reporting negative free cash flows. Nvidia's results – and CEO Jensen Huang's outlook – could go a long way toward soothing the market... or not.
Greg is a former Wall Street trader who once made $4.6 million in a single day. He uses recurring market cycles like these to find what he calls "Doubling Windows" – short stretches when a stock or fund is set up for an outsized move. And he believes the post-midterm setup has opened another one of these windows – one that could let readers double their money in as little as 18 days.
All the best,
Corey McLaughlin
Editor's note: Greg has identified 28 trades that gained 100% or more in 18 days or less. Now, the legendary Wall Street trader believes the midterm-election results have created another opportunity to make an extraordinary short-term gain. He recently joined Stansberry Research Publisher Matt Weinschenk to explain the 124-year historical pattern behind this setup – and why investors need to pay attention before a potential market correction arrives in 2027.