From FT Alphaville:
Not your father’s market: Tech tantrum shows how US equities trading has changed
US technology stocks are now enjoying a welcome bounce. But the savage two-day “tech tantrum” that wiped billions off the market capitalisation of firms like Apple and Amazon has raised a host of interesting questions about the dramatic evolution of the US stock market and the investment industry in recent years.
Explanations for the sudden sell-off abound, but many analysts are pointing to the increasingly algorithmic nature of investing. JPMorgan estimates that only roughly 10 per cent of US equity trading is now by traditional, “discretionary” traders, as opposed to systematic, rules-based ones, like exchange-traded funds, advisers who make rules-based ETF investments and computer-driven hedge funds.
Despite the rebound, many investors and analysts remain edgy, nervous that the sell-off could resume. Fund managers surveyed by Bank of America have fingered tech stocks as the most crowded trade in markets for a second month running, and Citi analysts warned that there “is a real danger that this will be followed by renewed losses” in the coming weeks that could end up in a double-digit percentage correction.
“This set up is now making us very cautious in the near term on the equity markets for the first time this year,” the US bank’s analysts wrote to clients on Tuesday.
What happened?
On Friday afternoon, a host of technology stocks that had been on a tear for much of 2017 suddenly and mysteriously tumbled.
Nvidia, a fast-growing chip company, went from a gain of over 5 per cent early on Friday to end the day down 6.5 per cent – an unusually violent swing for a $90bn company on no news. The tech industry’s giants were also pummelled, with the so-called FAANG stocks – Facebook, Amazon, Apple, Netflix and Google – shedding over $100bn of market capitalisation on Friday.
The weekend proved little respite. The S&P 500 technology index fell another 0.8 per cent on Monday, before clawing back some of the losses on Tuesday.
What was the trigger?
No obvious fundamental cause has been found, but analysts and investors have pointed to a confluence of factors that might have triggered the abrupt reversal.
Tech stocks have enjoyed a powerful rally this year, exacerbating concerns that the sector was sucking in investors chasing its performance and leading the industry’s stocks into overvalued territory, making a correction more likely.
On Friday both Goldman Sachs and UBS pushed out research notes with a sceptical view of tech stocks, which may have spurred some investors to take profits and pare down their holdings. Goldman’s analysts noted that while the free cash flow generation of the S&P 500 technology sector doubled from 2006 to 2016, it has since “plateaued”, making the 2017 rally less supported by fundamentals. Nvidia was also on Friday lambasted by Citron Research, a noted short-seller....MUCH MORE
