Back in June, when Goldman “accidentally” triggered a mini-tech rout with a note that would ultimately end up being their most read piece of research released in 2017, most investors couldn’t seem to get past the title:
That right there is the market equivalent of heresy. FANG can’t be mispriced. After all, no price is too high to pay for a slice of the future. “Just buy the damn robots” at any price. Josh Brown said so.
But if you did manage to get past the inflammatory title (which, by the way, wasn’t actually inflammatory because there’s never a “bad” time to ask if you might be paying too much for something), what you were treated to is a very good question. Basically, Goldman asked whether it was dangerous that tech was becoming synonymous with low vol. To wit:
While not exactly a Fields Medal worthy observation, we note that FAAMG is positively correlated with Growth and Momentum and this relationship has strengthened in recent months. The bigger anomaly, however, is that FAAMG is almost as highly correlated with Low Vol (as measured by standard deviation of 1Y daily price returns), which is not a characteristic typically associated with cyclically driven TMT names.
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.
And while fundamentals haven’t turned against tech as of yet, we did see a pretty significant factor rotation beginning on November 29 that culminated several days later in the worst 5-day underperformance for big-cap tech versus the S&P since 2009. That episode underscored the notion that even if the fundamentals remain solid, tech is vulnerable to a momentum reversal and to a rotation out of the year’s relative winners as investors try to price in the tax cuts and the revival of the U.S. reflation narrative.
Anyway, without getting too far into the weeds on the holiday, I did want to show you the following chart which suggests that since Goldman’s note, relative implied vol. on tech (i.e. the ratio of VXN to VIX) has reverted to levels last seen before the crisis:
Does that signal trouble ahead? Maybe, maybe not. But the bottom line is that, as BofAML recently wrote, “signs of fragility events have lingered in Tech.”
