FANG-type (Facebook, Amazon, Netflix, and Google) stocks recently had their worst day ever. Should we care?
We shouldn’t care just because they had one bad day, but we should care. Why? Let’s compare it with the last tech drawdown in February 2018. After having soared in January, in the first half of February tech stocks were hit hard, briefly hitting negative territory for the year. What happened next? Tech bounced back hard, to new highs. What did the market look like that might have made you think that would’ve happened? To talk about this in a blog piece requires some enormous oversimplification, but I think it’s worth talking about, so let’s consider a somewhat simplistic answer. A good, broad way to look at these things is through what I call the four pillars of investing – macro, fundamental, technical, and sentiment.
I tend to de-emphasize sentiment and technicals in my work, but I recognize they can become pretty important, particularly as a trend becomes better established, and the tech trend has been moving up for quite a while now. So what did the trend look like? I thought these two pillars were fine. There was a scary day where tech stocks broke technical support, but that breach of a support level couldn’t even last the day. Moving averages like the 50DMA were still headed up. Sentiment? There are lots of ways to slice and dice that, but a pretty easy, quantitative way to do it is the volatility index of the Nasdaq-100 (VXN.) Even more useful, let’s compare it to S&P 500 volatility index (VIX.) Also, traditionally tech has a higher beta than the market, which is a fancy way of saying it’s more volatile by nature. Thus, Nasdaq volatility is often greater than general market volatility, so the question is how the relationship looks over time. That may sound a little tortured, but what I’m looking for is to see if people are worried about the market or worried about tech more specifically. In February both VIX and VXN rose, but VIX actually rose more, so people weren’t worried about tech – in fact if you look at early February people seemed downright giddy on tech. Sentiment was pretty positive on tech (h/t to Joe Weisenthal for the basic idea.) Put another way, people may have been worried about tech, but they were more worried about the market in general.
Fundamentals? At the time, we didn’t know February was more or less the top for earnings expectations. Expectations still looked pretty good. Macro? Pretty similar to earnings. It turns out that was broadly the top in economic metrics, but it would have been very hard to know that at the time. There was a dearth of clear warning signs. You could have made a bet that everything was about as rosy as they could be, but late in a long-lived trend it’s not realistic to expect many people at all to perceive a trend shift. For that matter, such an aggressive trend shift doesn’t even necessarily pay off – as long as other people are willing to believe, the trend can continue, which is what we saw.
What about now? Technically, while you can have a different view, I’d say the trend seemed to change when the market made a lower high on March 26. That’s somewhat aggressive, I admit, but a lower high is a change, and it was a change on relatively high volume, which lends credence to it. Making a lower low would solidify that idea. You could claim the Nasdaq made a lower low in February, and also broke the 50DMA, but it recaptured it quickly and made new highs. This time, the Nasdaq broke the 50DMA and failed to go higher when it touched it again. I wouldn’t particularly hang my hat on technicals in either direction right now, I’d just say it looks bad, particularly in conjunction with other indications. In sentiment, VXN is at a 13-year high vs. the VIX. People are scared of tech now, where they weren’t at all in February, and to an extent that hasn’t been seen for quite a while. Sentiment seems to have turned, which is dangerous after a long bull market.
Earnings estimates have broadly stopped going up. Admittedly 30 days is not a huge amount of time to claim that indicator has to mean a lot, but it’s something to note. As for macro. data have generally been slowing since February. You can see this relatively simply by looking at things like the multiple downward revisions in the Atlanta Fed’s Nowcast estimate of GDP and the lower yield on the 10Y Treasury, which tends to correlate well to growth expectations.
So should we worry about tech? I think we should definitely worry. I wouldn’t guarantee problems ahead, but I’d say there’s a high probability that the broad, long run in tech is over.