tech sector suffers a glitch as volatility starts to move 1853942017

Friday’s unexpected sell off in US tech stocks surprised financial markets and has left investors with a couple of key questions. Firstly, does the sell-off […]

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By :  ,  Financial Analyst

Friday’s unexpected sell off in US tech stocks surprised financial markets and has left investors with a couple of key questions. Firstly, does the sell-off in technology shares justify a broad sell off in other risky assets? Secondly, is the sell off localised, will it be short-lived and could it offer a chance for other sectors of the US market to play catch up with tech?

We believe that the latter could be correct, as nothing fundamental appeared to spark this sell off. Instead, the selling pressure appeared to be triggered by a report from Goldman Sachs that pointed out the enormous boost to the market capitalisation of tech stocks this year, some $600bn, which may be stretched. Apple dropped nearly 4% on Friday, and was under continued pressure early in the US session on Monday, along with other Silicon Valley giants.

Low volatility, a coiled spring?                                     

We believe that there are elements to Friday’s sell off that could worry stock market bulls. The first is the pick-up in volatility from one of its lowest ever levels, the Vix index jumped further on Monday to its highest level since mid-May when fears about the stability of the US Presidency rocked global markets. If the VIX can break above the 12.75 – the 200-day moving average – then we could see further upside for Wall Street’s fear index, back towards the mid-May highs at 16.50, which could spell bad news  more broadly for risky assets.

Volume – why investors may wait to buy the dip

The other point to note is volume. Volume in both the S&P 500 and the Dow Jones spiked on Friday, and is likely to remain elevated at the start of this week. You can see the spike in volume in the S&P 500 in the chart below.

This chart shows that over the last couple of months we have seen volume spike when there have been sell offs in the market, yet we haven’t seen volume pick up when stocks have been making record highs. This suggests it is easier to stoke downward momentum in the US indices compared to upward momentum, as investors are more interested in selling stocks rather than picking up stocks on the dip.

Figure 1:


Source: City Index and Bloomberg

Why financials may benefit

At this stage, the sell-off in the tech sector looks to be ongoing, and we could see further losses for the Silicon Valley titans in the coming days. However, it is worth noting that at the start of trading in the US session on Monday there are roughly an even number of advancers and decliners in the S&P 500. Thus, rather than a broad-based sell off for markets, we could see some sector rotation. We argue that this could be good news for financials, who could benefit at the tech sector’s expense. US financial stocks could also benefit from political developments. The House of Representatives have sent a bill to the Senate to reduce financial market regulation. If this passes then we could see upward momentum in financial stocks start to build.

The chart below shows Goldman Sachs and Apple, this chart has been normalised to show how the two stocks move together. As you can see, Goldman Sachs (as benchmark for US banking stocks) has underperformed Apple since mid-April, however, it rallied on Friday as Apple fell sharply, and Goldman’s share price has actually outperformed Apple on Monday after another hefty sell off in the tech sector.

Thus, if we continue to see tech stocks come under pressure then we may see some sectorial rotation from investors that benefits financials rather than the technology giants.

Figure 2:


Source: City Index and Bloomberg

New tech vs. Old tech

Overall, the sell-off in the market is mostly concentrated in the tech sector, however there is a further element of distinction in this sell off, with “new tech” faring worse than “old tech” and we are seeing the new generation of the Silicon Valley titans such as Netflix and Facebook sell off more sharply than the “old tech” sector, with the likes of Google and Cisco escaping the worst of the selling pressure on Monday, as you can see in the chart below. This suggests that at this stage, the sell off appears localised within the tech sector, and the broader market may remain unscathed, for now.

Figure 3:


Source: City Index and Bloomberg



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