Saturday 16 December 2017

Hedge funds and Bank of Japan in frame for US tech stock caning

A note on Nvidia clipped the high-flying tech firm’s wings
A note on Nvidia clipped the high-flying tech firm’s wings

Blame the computers ... or the hedge funds ... or the hedge funds with computers.

Pundits have been grasping for the root cause behind the brisk retreat in tech giants like Facebook, Amazon, Netflix, Alphabet, Microsoft, and Apple. that started on June 9 and carried through the weekend.

This group of stocks averaged a 1.6pc decline over the past two sessions that still leaves it up more than 20pc year-to-date.

Theories aiming to explain their sudden dip run the gauntlet from the reasonable to the absurd to the relatively boring.

The Friday selloff was part of a systematic unwinding of momentum strategy, according to Andrew Lapthorne, global head of quantitative strategy at Societe Generale.

Stocks that had done well over the past 12 months - regardless of whether they were in the Nasdaq 100 or S&P 500 - were the ones that took it on the chin.

Tech shares have been the market leaders all year, with the likes of Apple, Facebook and Netflix up more than 30pc before Friday. That compares to a 10pc gain in the S&P 500.

"The uniformity of the prices moves all on the same day indicates a market driven by price-chasing momentum, with investors heading for the door all at the same time," he wrote in a note to clients on Monday.

"Friday's plunge serves as a warning; when it's time to head for the door, you better move fast."

To some, the tech selloff had its genesis in a Goldman Sachs note put out a few hours before the move.

The group of mega-cap stocks had been seeing exceptionally low levels of realised volatility that led to "positioning extremes," Robert Boroujerdi, the firm's global chief investment officer, said.

"Mean reversion risk is increasing," he warned. And lo and behold, some reversion to the mean ensued.

Here's another reason that doubles as an explanation for why volatility's been historically low.

A tweet from Citron Research's Andrew Left calling for a steep decline in Nvidia appeared to help clip the high-flying tech company's wings - and was also cited by some as the cause for the broader selloff in the space.

Ironically, Left advised investors to take profits "and move on to Google" - a firm whose shares have also been hit, though not as bad as Nvidia's.

Brean Capital macro strategist Peter Tchir raised the prospect of a sell programme that had earlier targeted one of the most famous four-letter acronyms in the market - FANG (Facebook, Apple, Netflix, Google) - resurfacing on Friday.

"On Wednesday morning, I highlighted that the only thing that had struck any fear into my streams of market chatter was the FANG-led sell programme that started around 3pm on Tuesday," he wrote.

"Whether Friday was a continuation of someone looking to drive this sector lower or just a coincidence remains to be seen."

And now for what seems to be the go-to reasoning for many market moves these days: monetary policymakers.

"If I wanted an alternative explanation of why tech stocks finished last week with a caning, I'd be sorely tempted to think about the greater fool theory and the BOJ," writes Bloomberg's Richard Breslow, citing market-moving reports of a communication tweak regarding the potential for some sort of balance sheet normalization.

The Bank of Japan has become a massive player in not only bonds, but also domestic equities through its ETF purchases.

This argument is bolstered by the fact that Fast Retailing has done worse than the six aforementioned tech giants so far this week.

The BOJ owns roughly half of the free float of Fast Retailing, and the stock has a history of being influenced by rumours about changes to the central bank's purchasing programmes.

There's also a theory floating around that the Swiss National Bank has been dumping its hefty tech holdings.

One potential culprit for the retreat in these leaders of the 2017 equity rally: hedge fund Viking Global Investors said they'd be returning $8bn to investors in a letter sent on Monday.

The $30bn fund already liquidated a sufficient amount of its holdings by then - and as of March 31, it had loaded up on large-cap tech names.

Consolidation; a healthy pullback - call it what you will.

All good things come to an end. Tech shares have been the market leaders all year, with the sector ETF more than doubling the S&P 500's year-to-date advance before Friday, prompting Morgan Stanley analyst Michael Wilson to remark that a selloff was "way overdue".

At the end of May, the ratio of the Nasdaq 100 to the Russell 2000 Index had reached levels unseen since the tech bubble was bursting in 2001, suggesting this recent run of outperformance may have run too far.

In Europe yesterday, technology stocks again showed recovery and were the best performing for the second session in a row, a 1.3pc rise giving European shares another leg up.

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