Don’t look now, but one of the relationships that exemplified tech’s “safe haven” status in the months since the pandemic sent global equities tumbling, now appears to be sending an ominous message about some of the market’s best-performing shares.
On Monday, in “‘The Worse COVID Gets, The Better The Markets Do’ (A Misleading Story)“, I mentioned that the ratio of the Nasdaq’s “fear gauge” to the regular VIX recently touched levels not seen since February 2018, when an existential crisis in the VIX ETP complex threw the relationship off-kilter.
Fast forward 48 hours, and a rebound in the ratio between the two has accelerated, with the spread blowing out to levels not seen in more than a decade and a half (figure).
That could bode poorly going forward, especially in the event tech earnings fail to live up to expectations.
There are, of course, plenty of critics who say that while the investment thesis for tech has indeed been strengthened by the pandemic’s assumed impact on consumer preferences and also by a prospective shift in human psychology in favor of more virtual interactions, the sector has simply run too far, too fast.
The Nasdaq 100 is bumping up against overbought territory after touching new record highs despite (and, in many respects, because of) rising COVID cases.
Some argue that despite the laundry list of good reasons to stay Overweight what’s worked (and what will likely continue to work assuming the global economy doesn’t stage a robust recovery and thereby flip the narrative in favor of cyclicals), it’s time to be rational and take some chips off the table.
That big-cap tech is rising alongside implied vol. is seen by some as confirmatory.
Admittedly, I’m not totally enamored with this “thesis”, which was the subject of a Bloomberg article on Wednesday. It’s not so much that I discount the signal, it’s just that I’m not sure you need all of the above to make the case for turning cautious on the Nasdaq if that’s what you’re inclined to do.
Big-cap tech is up 22% in 2020. Are there good reasons for that? Does it make sense in the context of the pandemic? Are the mega-caps caught in a virtuous (for them) self-feeding loop? Is there a case to be made that tech can rally to infinity? “Yes”. “Yes”. “Yes”. And “sort of”, with the obvious caveat that nothing lasts forever.
But at the end of the day, if you want to cast a wary eye towards the space, perhaps consider ditching the mental acrobatics in favor of simply pointing at the screen and saying “the tech stocks are too damn high!”