This year financial markets have been dominated by 3 themes: Covid-19, market stimulus and an incredible tech bull-market run. It is no secret that we have been cautious with our exposure to tech this year. While our portfolios have a healthy allocation to the Nasdaq and a handful of individual tech stocks, we have stayed away from the temptation of over-exposure to this sector. It was inevitable that there would be a pullback at some point and over the last few days we have seen just that with rapid losses of 11% on the Nasdaq, 15-20% on names such as Apple and Shopify, and a massive 33% slide for Tesla. Investors that have ploughed into these stocks overzealously have sustained massive losses over the last week.
There are a number of factors that led to this pullback. 1) Tech stocks were the undisputed beneficiary of the Covid-19 crisis resulting in a huge amount of re-allocation to that sector. 2) The stimulus added into the system meant a huge amount of cash had to flow somewhere; momentum trades on tech stocks were a logical avenue. 3) This momentum trade was amplified in recent weeks through an exceptionally high volume of option trades. Both hedging and unwinding of these trades requires a lot of trading in the underlying stock. Put those 3 together and you are guaranteed some serious volatility. Most notably the giant Japanese tech investor, Softbank, put on a massive 50bn tech option trade in recent weeks which undoubtedly contributed to the wobbles.
It is probably a good time to mention that we don’t believe that this is the start of a dot-com style bubble-burst. More likely it is the first in a series of pull-backs which are inevitable when you have such huge monetary catalysts at play (this is a phenomenon we first pointed out back in February this year, so we are not surprised to see it play out). It doesn’t change our long-term belief that allocation to the tech sector is vital. The point is that investing never has been, and never will be as easy as just ploughing head-first into the latest fad (be it Bitcoin a few years ago, or Tesla in recent months). Plenty of retail investors who finally succumbed to the temptation of Tesla a few weeks ago will have learned that the hard way. Just a few weeks back we discussed how some of these tech companies have tripled their market caps in only 6 months, while the underlying fundamentals of the company are equal at best. By definition that means that these mega caps can drop 20% of their value on very little news, and that is exactly what happened over the last few days. If you want a balanced portfolio with low volatility you quite simply can’t be 100% allocated to tech.
It also makes very little sense diving into a momentum trade on the back of a huge rally, in particular given the current market backdrop: Infection rates globally are still increasing, vaccine progress is slow, economic damage is still being digested and further lockdowns (at least localized) are not only possible, but likely. We are also only a few weeks away from the US elections, and while the outcome seems to be becoming less binary one would be foolish to disregard potential surprises. On top of that we need to start looking towards paying the price for all the printing that’s been done. Helicopter money will come to an end, as will furlough schemes, as will mortgage and tax holidays. In the UK it is already obvious that taxes will increase across the board in the near future.
Our advice, as usual, is to trade when volatility is elevated. The VIX has been locked in the 20s for the better part of a month, but spiked into the high 30s over the last few days. It pays to have some patience in this market. After a long time sitting on the sidelines we closed our first vol trade in weeks just yesterday. These vol spikes are almost guaranteed to re-appear for quite a few months to come. During a conversation with a client less than 2 weeks ago we talked about the phenomenon of increased volatility coupled with a strong intra day rallies. This is usually rare, but has happened 3 times this year (the last time was on the 27th of August) and every time it has been a clear signal of impending pull-back. Our portfolio allocations are largely unchanged. Please feel free to contact us for specific queries or trade ideas via the website.
4 thoughts on “The Tech-Rollercoaster”
What do you think about GBP right now? Is it an opportunity given the recent sell-off?
GBP moves are totally misinterpreted currently in my opinion. In recent days the headlines have read that sterling sold off due to Brexit talks. Totally untrue in my opinion; GBP is a blatant risk-off currency right now. It’s completely correlated to equities and most other risk assets in the last 6 months. It’s been rallying hard, with markets for the last 3 months and then miraculous in the last few days Brexit becomes “relevant” again. Better explanation is USD rallied. Long-term my belief in sterling hasn’t changed. I started buying it heavily at 1.19 with a 2-3 year horizon in mind. Currently when it dips into the 20s I see it as an opportunity. I firmly believe gbp will be significantly stronger 2-3 years from now when brexit is a thing of the past and some of the benefits start to materialize. So convoluted answer, but yes at 1.291 I’d buy gbpusd
I just read your last few articles. Pity I didn’t know about them start of the year! You’ve been incredibly intuitive last few months. You had advised caution re tech for quite some time in the face of an intense rally. I charted ndx yesterday and it has truly come back down to Earth. So my questions to you are- what happens next? What happens with the elections? How bad does the second wave get? How does one position?
That is very kind Ben, nice to meet you. I will drop you a quick mail and add you to our distribution list. Would be more than happy to discuss some themes with you in person. I’m currently writing an article which addresses some of your questions which should be out in a few days. “What’s next” might be a good title!
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