Goldman Asks: ‘What Is Going On With Tech?’

Goldman just wants to know one thing on Thursday:

What is going on with tech?

All year, those of a skeptical persuasion (guilty as charged) have been shouting from the rooftops about the extent to which this market is starting to feel like a dot-com boom-bust redux. And here, broadly, is why:

To be sure, there have been some bumps in the road. Like when, in early June, Goldman warned that tech was starting to become synonymous with momentum and, more worryingly, low vol., a state of affairs that not only masked underlying vulnerabilities in the space, but also served to embed tech in a number of factor-based ETFs, thus supercharging the rally, perpetuating the existing dynamic, and making it all the more likely that should reality reassert itself, the drawdown in tech would be deeper than it would have been otherwise. Recall what happened to the Nasdaq VIX-regular VIX ratio in early June after Goldman’s warning triggered a selloff:

But the jitters proved fleeting and ultimately, the Nasdaq would go on to hit record highs along with everything earlier this month.

That said, tech has been underperforming of late. Have a look:

“While the market continues to set new highs, there is a sense of growing discomfort among investors as Tech has taken a backseat during the recent rally and long/short books have started to underperform,” Goldman writes, in a note out Thursday afternoon.

So what’s causing this? Here’s Goldman’s take:

What is causing this? While Tech got off to a strong start in Q3 (+6% thru August), the month of September has given way to an apparent rotation away from Tech (Tech has underperformed Energy/Financials by 4-7% MTD). Based on investor feedback, investors generally acknowledge that this rotation likely has less to do with fundamentals and more to do with broader market inputs, namely:

1. Rotation from Growth to Value starting to pick up after the spread widened to multi-year levels during 3Q. Tech is the best proxy for growth in the market — XLK daily returns are 95% correlated to Growth factor — so as this factor rotation picks up, it is worth watching the Tech sector as a ‘source of funds’ candidate (Financials and Energy are highly correlated to the Value factor).

2. The 10-yr. Into yesterday’s FOMC meeting (near-term message from the FOMC was hawkish), the sharp move higher in US 10-yr yields appears to have served as an additional headwind for Info Tech as Tech’s correlation to the 10yr has again turned negative (Exhibit 4), approaching post-election lows.

3. Positioning: Latest 13-F filings (as of 6/30) illustrate that Info Tech remains a consensus long among both Mutual Funds (+387 bp OW on an aggregate basis) and Hedge Funds (one in four HF dollars allocated to Tech on a net basis).

So that’s all fine, good, and plausible, but maybe – just maybe – people are finally getting nervous about a space that’s run way too far. As Goldman concedes, “there are questions about valuation, regulatory risk, etc.”

Yes… “etc.”