Thursday 22 March 2018

Tech stock rally is tipped to resume after sell-off

Traders work on the floor of the New York Stock Exchange (NYSE)
Traders work on the floor of the New York Stock Exchange (NYSE)

Dani Burger

Investors wondering how long the distaste for technology stocks will last may be asking the wrong question.

The popular narrative is that stock pickers are selling tech after the massive run-up this year and are piling into companies set to benefit from US tax cuts. But observers like Andrew Lapthorne of Societe Generale don't buy it. They look at the contours of the sell-off over the past few days and have a different take: a few heavy hitters are dumping factor positions that incidentally hurt chipmakers and software companies and once they're done, the rally will resume.

Two factors stood out last week. First, the plunge in the momentum trade (betting on past winners to continue winning), and second the gains in value (seeking out underpriced stocks) to near-record proportions. Because the moves were severe in US stocks and occurred across sectors, macro forces aren't causing a rotation from technology to financials, strategists reason. Rather, computer-driven funds liquidated or readjusted factor exposures, they say.

"It seemed to be tax-related, but it was pretty extreme. To get such a rapid move on a particular day must be a function of flow," Lapthorne, the global head of quantitative strategy at Societe Generale, said. "To get such a strong relationship between a factor and performance always seems a little bit smacking of systematic."

Because factors target a share's characteristics, managers hold factor positions both accidentally and intentionally. Take momentum. Roughly defined, momentum bets on the best performing stocks over the past 12 months, while shorting the worst.

Fundamental managers might have outsized exposure if they've snapped up tech stocks this year. Yet systematic funds will buy a market-neutral version of momentum - a concentrated bet that hedges out greater market forces.

Through Friday, the Bloomberg US pure momentum portfolio had its worst week since April 2016. Such a demolition of long-short momentum can be caused by a concentrated bet unwinding, says Pravit Chintawongvanich, head of derivatives strategy at Macro Risk. "The 'momentum unwind' effect is observable even within sectors," Chintawongvanich wrote.

"They tend not to portend much for the market; once the unwind has run its course, typically the 'long momentum' stocks resume rallying."

But more than momentum, the culprit here was probably value, according to Lapthorne, who notes that last week, the strategy betting on the cheapest stocks had its biggest daily rebound since March 2009.

A similar and transient factor-led move occurred earlier this year. In June, technology stocks sold off with momentum at an impressive clip, only to recover within a month.

Much like value's surge last week, such a sharp move is symptomatic of someone covering their bet against a factor or taking on a new factor position, Lapthorne said.

"We've seen this before," he added. "Everyone makes a song and dance that tech stocks have fallen, but then you scratch below the surface and it looks factor-led."

The idea may have gained some support on Tuesday. The biggest companies recovered some of their losses, with pure momentum posting the best gain in more than two weeks. (Bloomberg)

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