Tech Turmoil: Black Swan Vol. Event Burns ETFs, Hedge Funds Dump Nasdaq Longs

In case you haven’t noticed, folks are getting nervous about tech.

Here’s what the Nasdaq 100 did in June:


And that’s a real goddamn shame, because tech was the glue holding everything together in the face of increasingly lackluster data and jitters about the Fed hiking into a deflationary backdrop. Indeed, it’s been no contest YTD as the Nasdaq just turned in its largest H1 gain since 2009:


But investors are starting to question the sustainability of a situation in which a handful of techy names are shouldering a disproportionate share of the burden.

And Goldman didn’t help matters by reminding investors that FAAMG is becoming increasingly correlated with momentum, growth, and low vol. Recall the following excerpt from the bank’s now infamous FAAMG warning:

The bigger story in our view is FAAMG — Facebook, Amazon, Apple, Microsoft and Alphabet — a group of five stocks which have been the key drivers of both the SPX & NDX returns year-to date. This outperformance, driven by secular growth and the death of the reflation narrative, has created positioning extremes, factor crowding and difficult-to-decipher risk narratives (e.g. FAAMG’s realized volatility is now below that of Staples and Utilities).


If FAAMG was its own sector, it would screen as having the lowest realized volatility in the market. How can low vol create a problem? Investors are increasingly focused on “volatility-adjusted” returns as they are deciding which stocks to invest in. We believe low realized volatility can potentially lead people to underestimate the risks inherent in these businesses including cyclical exposure, potential regulations regarding online activity or antitrust concerns or disruption risk as they encroach into each other’s businesses.


Mechanically, we expect that as the realized volatility of a stock drops, more passive “low vol” strategies buy the stock, pushing up the return and dampening downside volatility. The fear is that if fundamental events cause volatility to rise, these same passive vehicles will sell and exacerbate downside volatility.

Got that? Great.

Well guess what? The ratio of NDX vol. to SPX vol. is now a six-sigma event versus the last 5 years:


So there’s a black swan for you.

Now with everything said above in mind, consider the following out Friday afternoon from our homegirl Dani Burger:

Several multi-billion-dollar exchange-traded funds that are billed for their low volatility have been anything but in recent days after rebalancing into a record amount of technology shares. Suddenly, they’re cauldrons of turbulence after a three-week span in which computer and Internet stocks went from the market’s standard-bearers to its worst performers.

Providers often tout low volatility as a risk mitigating strategy: buy the fund and you’ll get most of the market’s upside with less downside. And while a few days’ price action means nothing for the concept’s viability, that’s not what’s been happening of late. Weighed down by tech, the PowerShares S&P 500 Low Volatility Portfolio, or SPLV, dropped 1.1 percent Thursday for the biggest daily drop in more than six months. The iShares’s MSCI Min Vol USA ETF, or USMV, fell 1 percent, its most since November.


The $14 billion PowerShares and $6.9 billion iShares products are two of the most popular low volatility ETFs. Both rebalanced last month, pumping up technology to 11 percent of SPLV’s holdings and 18 percent for USMV, the most since their inception in 2011. USMV tends to hold more technology stocks, since it’s built to never deviate more than 5 percent from the broader market’s sector weightings.


More tech tantrums will spell trouble for the low volatility funds. With rebalances scheduled on a quarterly or semi-annual basis, they’re committed to tech for at least the next two months. A similar contamination happened last year, when low-vol and momentum stocks became closely correlated, sideswiping the latter when momentum skidded out in the fourth quarter.

What say you, Walter?…


Oh, and just in case you needed a little extra bearishness with your tech, note that according to the latest CFTC data out this afternoon, specs just cut their Nasdaq net longs for the second week in a row to 51k contracts, the least bullish since July of last year.



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