Every time, there is a major market dislocation, it's likely that some investment firm or company is in big trouble. And, often there are signs of these dislocations in unusual market action. Currently, we are seeing a selloff in both stocks and bonds which is certainly unusual and adding to the market's uncertainties. One possibility is that many hedge funds with large exposure to growth stocks are in big trouble.

If investors in these funds pull out their money, these funds could be forced sellers, adding even more to the pain and losses in these stocks. During these types of conditions, the analogy of Wall Street as a bunch of sharks ring true, as traders will short these stocks, pushing them even lower and looking to force a liquidation event.

And, such occurrences seem to be typical during these conditions. Last year during the meme stock mania, Melvin Capital was on the brink of liquidation and had to be recapitalized as it had large short positions in those names. During the early stages of the housing collapse, funds that were invested in junk-rated mortgage-backed securities, using leverage, had to be liquidated.

This time around, the locus of pain is found in growth stocks. The relentless outperformance of growth stocks over the last decade meant that hedge funds, which specialize in these stocks, like Tiger Global enjoyed extraordinary success which led to more inflows.

However, this positive flywheel ended in 2021 as the markets faced a much different landscape with inflation and rising rates. All of a sudden, investors could find earnings growth in all types of places and in stocks with much cheaper valuations.

In a low growth and low inflation world, it's possible to justify buying growth stocks based on forecasts years into the future with the expectation that rates will remain low. This is not the case in a rising-rate world, where these future cash flows are worth less.

All across the landscape, there are blow-ups in the growth stock world. Even after today's session, we are seeing many growth stocks down between 10% and 40% following earnings misses.

The silver lining is that these types of extreme moves and blow-ups tend to happen around short-term or intermediate-term bottoms. Thus, a public blowout or recapitalization of a growth stock fund should be the signal to close out shorts and look for a bounce.