To see how fast sentiment soured on last year’s momentum winners, look at the options market, where the price of insuring technology stocks against losses is holding stubbornly high versus other industries.
A Chicago Board Options Exchange gauge tracking costs of hedging in the Nasdaq 100 Index is the highest since August versus a similar measure for the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The ratio of the two gauges sits 11 per cent above its seven-year average and is hovering at a level has reached only two other times since the start of the bull market.
Shares tracked by the Nasdaq 100 rallied more than 50 per cent faster than the broader market since global equities bottomed in 2009 -- and now they’re falling twice as fast. The divergence reflects a growing skepticism among investors who have embraced defensive industries in 2016 while eschewing stocks whose main appeal had been how fast they were already going up.
“Companies in the Nasdaq 100 are much more in play than the general economy stocks, and people are finding them more difficult to price,” said Dominic Salvino, a specialist on the CBOE floor for Group One Trading LP. “They’re not as confident in technology as they have been in the past.”
The Nasdaq 100 has slipped 5.7 per cent since the start of the year, while the S&P 500 has fallen 1.7 per cent. The Nasdaq gauge also fell more during a selloff last August, losing 12.1 per cent over six trading days, compared to a 10.9-per-cent loss for the S&P 500 Ex-Energy Index.
The six biggest stocks in the Nasdaq 100 are technology companies, with Apple Inc., Microsoft Corp. and Amazon.com Inc. comprising more than a quarter of the index. Over the first six weeks of the year, Amazon, which makes up 5.3 per cent of the index, plunged 25 per cent, while the broader index lost 11 per cent.
The larger moves in technology shares can be seen through a comparison of past price swings. The Nasdaq 100’s 30-day historical volatility has risen 30 per cent since the start of the year, almost double the 16-per-cent increase in the S&P 500 measure.
Sentiment has been turning against last year’s winners, which included Netflix Inc., Amazon and Activision Blizzard Inc. The companies were the three best performers in the S&P 500 with gains of more than 92 per cent. A bubble has formed in momentum assets, which will result in a “mean reversion” where they converge with so-called value stocks, according to Marko Kolanovic, the New York-based head of global quantitative and derivatives strategy. That could mean heightened volatility, he said.
Technology stocks also trade at higher valuations than their broader S&P 500 peers. The Nasdaq 100’s price-to-earnings ratio reached a one-year high versus the benchmark index in December. Since then, the Nasdaq multiple has tumbled faster than that S&P 500’s, dropping more than 8 per cent versus 0.9 per cent.
The S&P 500 VIX has traded below the 20 level for the past eight days, its longest such streak since December. The so-called fear gauge fell 5.5 per cent to 17.05 at 9:39 a.m. in New York.
“Recently you’re seeing more volatility flying into tech than normal, relative to the general market,” said Mr. Salvino. “The hard pullback in the S&P VIX wasn’t mirrored in the Nasdaq because of its component makeup.”Report Typo/Error