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Landscape. The index loses more than 4% and then recovers in the final. Derivatives trading has artificially pushed prices, which experts say are excessive compared to the company’s results.
by Vittorio Carlini
Landscape. The index loses more than 4% and then recovers in the final. Derivatives trading has artificially pushed prices, which experts say are excessive compared to the company’s results.
4 ‘reading
On the one hand, the risk of concentration and sales, linked to high technology. On the other hand, the expectations about the Fed’s monetary policy. These are some of the key issues to understand the recent dynamics of the stock market. Especially in the United States. Yesterday, just after the better-than-expected US unemployment figure, the Dow Jones was in positive territory for a while. On the other hand, the S&P 500 (albeit with little strength at first) entered the red while the Nasdaq accelerated lower. Then, in the late afternoon, with the European charts that had contained losses (Milan closed at 0.8%), all the US indices embraced and fell further. Finally, in the late afternoon, we partially recovered the ground.
High tech too “important”
Beyond individual percentages, what are the causes of this trend? One reason, precisely, is the concentration, the high weight in high-tech stock indices. The so-called Famag (Facebook, Amazon, Microsoft, Apple and Google) are worth more than 22% of the S&P 500 and almost 40% of the Nasdaq composite. In a similar context, technologies, considered among the few sectors capable of growth in the current economic-health crisis, when they were bought, pulled the whole of Wall Street from the sprint. Now that, on the other hand, they are selling, they are pushing the entire stock market as well as their sector down. This trend, however, manifests itself not only in the last week. Since the beginning of the year, the S&P 500, in its traditional version, has grown by 6.9% (closing 03/9/2020). However, when, weighing all companies equally, the incidence of high-tech giants is reduced, the balance even becomes negative (-3.9%). And that is not enough. In Europe, the Stoxx 600, padded with less technology, in 2020 has basically the same performance in both the “normal” version (-11.8%) and the “equal weight” version (-12%). In short: technology, especially in the United States, gives. Technology takes away.
Yes, technology takes away. So are we facing the end of the honeymoon between high technology and markets? “I don’t think so,” says Giacomo Calef Country Manager from Notz Stucky. More simply, “compared to the Nasdaq composite, which gains more than 26% in 2020,” it is understandable that traders want to take home the capital gain. Also because, with the prospect of having the Covid-19 vaccine in 2020 and an economy that (although slowly) may recover, “investors are looking at other sectors that are objectively for sale.”
Derivatives speculation
However, with regard to technology sales, several experts focus attention on other aspects. One of them is derivatives speculation. In particular about options. In the last month there was an explosion in the volumes of these financial instruments. Many investors (according to the Financial Times, SoftBank would play a leading role in these strategies) have bought call (call) options on individual high-tech stocks to bet on their rise. Faced with such a jump in volumes, sellers of the same options were hedged by buying the underlying assets or their futures. In this way, an “artificial” bullish vicious cycle was created which, as a collateral effect, also aroused volatility. The VIX, which for some time has been at higher levels than before the outbreak of the pandemic, has jumped higher. An event that, along with the “artificiality” of the August rally of many high-tech stocks, generated sales.
Retail Investors
But it is not just a matter of speculation. Another cause of the “sell-off” is in the strong presence of private investors who do it yourself. American retail, also fascinated by free trade platforms like Robin Hood, entered the charts in droves. “These are investors – says Lorenzo Batacchi, portfolio manager at Bper Banca – who, many times operating thanks to loans or other forms of debt, have sold at the first difficulties.” A behavior that inevitably contributed to “increasing the scope of the ‘liquidation’.” Those sales that, according to various experts, are also the result of too high prices. Can you try again? The relationship between price and earnings. Some scholars note that the average P / e of Fanmags (Facebook, Amazon, Netflix, Microsoft, Apple, and Google) is around 41, while that of the rest of the S&P 550 is about 20 times. In short: the difference between the two indicators is high. Too tall! So much so that many doubt that it can be justified only with the best trend in the profitability of technology companies.
