The Phaserl


Tech Stocks Slammed Last Week: How Scary Is This Market?

by Pam Martens and Russ Martens, Wall Street On Parade:

Mark this date on your calendar: Friday, June 9, 2017. That’s the date that the big downward move in the largest tech stocks began. The day also saw a rotation into big bank stocks (which is like swapping a land mine for a hand grenade — there’s going to be an explosion, it’s just a matter of degree).

The selloff on Friday was triggered by a research report from Robert Boroujerdi of Goldman Sachs. The report compared today’s FAAMG tech stocks (Facebook, Apple, Amazon, Microsoft and Google-parent Alphabet) to the highfliers in the tech bubble that crashed in 2000: Microsoft, Cisco, Intel, Oracle and Lucent.

Boroujerdi used a lexicon that the market did not want to hear: “death,” “extremes,” and “difficult to decipher risk narratives.”

The exact sentence went like this:

“This outperformance, driven by secular growth and the death of the reflation narrative, has created positioning extremes, factor crowding and difficult-to-decipher risk narratives (e.g. FAAMG’s realized volatility is now below that of Staples and Utilities).

Let’s pause for a moment to examine the concept that a tech stock’s volatility could, rationally, be lower than “Staples and Utilities”. Consumer staples are things we buy regardless of boom or bust in the economy. For example, most of us have favorite brands of coffee, toothpaste, laundry detergent and the like that we will continue to buy even when money is tight and the economy is in recession. The same idea applies to utilities. We’ll pay our water and electric and telephone bills because we consider these utilities necessities. Buying an expensive new iPad or shopping for discretionary spending items online at Amazon have as much in common with staples and utilities as apples and oranges have to do with landscaping shrubs.

The reason for the low volatility is not because these tech stocks are the perfect vehicles for widows and orphans. It’s because hedge fund managers and mutual funds have crowded into these five names. According to the Goldman report, the five FAAMG tech stocks have increased their market value by $600 billion this year, accounting for approximately 40 percent of the year-to-date performance of the entire 500 stocks that make up the Standard and Poor’s 500 Index.

The Goldman research report suggested this low volatility could lull investors into a dangerous slumber, writing:

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