Tech Investors Pay Skyrocketing Prices for Risk Protection

The stunning sell-off among tech stocks has rattled many investors, causing them to rethink their attitudes about both this market sector and risk. After anemic efforts to stage a rebound, tech stocks are still well below their highs. On Nov. 14, the Nasdaq 100 Index (NDX), widely used as a proxy for the tech sector, closed 12.1% below its all-time high set in intraday trading on Oct. 1. The table below summarizes some recent signs of stress in the tech sector, as reported by Bloomberg.

Tech Stocks Under Stress: Red Flags

Source: Bloomberg, as of Nov. 12

Significance for Investors

As noted in the table above, not only have the prices of tech stocks tumbled since Oct. 1, but they also are showing multiple signs of stress, strain, and investor insecurity. After briefly rallying by 3.1% on Nov. 7, the day after Election Day, the Nasdaq 100 has since retreated by 6.0%, to close on Nov. 14 at a level last seen during the Oct. 30 trading day.

Reflecting increasingly wide price swings for tech stocks, the 30-day realized volatility for the Nasdaq 100 recently hit a value of 33.8, its highest reading since a tech stock sell-off in Sept. 2011, per Bloomberg. Meanwhile, the options market is predicting that the Nasdaq 100 will endure significantly wider fluctuations over the next month than the S&P 500 Index (SPX).

"The rising volatility, the widening price swings reflect investors' nervousness with respect to the story for tech, which appears to be changing." —Alex Bellefleur, chief economist and strategist, Mackenzie Financial Group

Source: Bloomberg

Matt Maley, investment strategist at Miller Tabak, had this to say, per another Bloomberg report: "There's a bloodbath. Now that we're seeing another downdraft in the group, investors are going to be much less willing to take their weighting in the tech stocks back up to where they stood before October. This will make it tough for the group to regain the levels they saw at the highs.”

Also according to this latter report, hedge funds now have a net short position on Nasdaq 100 futures, their most bearish stance since May, based on data compiled by the CFTC. Additionally, in a recent one-week span, investors withdrew more than $300 million from tech-oriented ETFs, while equity-related ETFs in total brought in a net $3 billion in new investor money, per Bloomberg's data. A report from Bank of America cited in the same article indicates that tech stocks have flipped from enjoying a net $41.3 billion inflow of investor money during the 21 months through September to experiencing a net outflow of $3.1 billion in October.

Looking Ahead

The recent action suggests that nervous investors, their confidence in tech stocks shaken, if not shattered, may continue to flee the sector. These investors may engage in selling it short, or pay up for downside protection with put options. In any case, this marks quite a turnabout for a once-glamorous sector. While data compiled by Bloomberg indicate that tech stocks as a group are expected to post a 31% year-over-year (YOY) earnings increase in 2018, versus 24% for the S&P 500 as a whole, the gap is expected to disappear in 2019. Meanwhile, the tech sector currently commands a 20% valuation premium to the S&P 500, per Bloomberg. With earnings growth reverting to the mean, it is likely that valuations will follow.