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What does Friday's Viacom-Discovery sell-off tell us about the market?

CBS Viacom sharp sell-off on Friday

With US markets currently back at record highs, this weekend’s news story is of an “unprecedented” block trade sell off by a mysterious seller, which saw the likes of ViacomCBS and Discovery shares lose more than half of their value in the past few days.

While the speed of the fall has attracted attention for all of the wrong reasons, prompting speculation of a large margin call liquidation, what most people appear to have missed is that both of these companies have seen their share prices almost quadruple since October last year, as shown below.

Source: CMC Markets   

There has been a great deal of speculation about the reasons behind the falls over the last few days, and it’s probably too early to say why at this point, suffice to say we are coming to the end of the month, and the end of the quarter, and perhaps some investors are probably a little too one way when it comes to portfolio weightings.

One thing is certain, there are a lot of companies out there trading on hopelessly optimistic valuations and as far as these two particular companies are concerned, their share prices were way out of sync relative to their long-term 200 day moving averages. This sort of scenario is rarely sustainable and I suspect might raise similar questions about other optimistically valued company valuations.

While it can be claimed that what happened on Friday was highly unusual, what about anything that has happened over the past few years is normal or usual? We have hundreds of companies trading at valuations that bear any, if little relation to their underlying fundamentals. That is also very unusual, yet we don’t see too many headlines about that, and now we’re suddenly worried about over-leveraged hedge funds, after a sharp realignment in two companies' share prices, that are still in positive territory for this year.

There are certainly valid questions to be raised as to what caused these big drops, however the falls were still long overdue from a technical standpoint, and if these events prompt a reassessment of where investors currently have their money in some of these overvalued sectors, they are unlikely to be the last we see of this type of volatility.

Maybe, as we look ahead to Q2, we will start to see investors and markets start to become more circumspect and critical about where they put their capital. If anything, maybe the events of the last two days are a reminder that not all valuations are equal, and some are more frothy than others. That should be a good thing.

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