The Daily Update - Volatility Shows Its Teeth

Monday’s stock market rally looks a little like a dead cat bounce (if that) with the S&P 500 rebounding off of its 200-day moving average (~2587) only to fall within striking distance again yesterday, touching 2596. Asian and European stocks furthering this decline today may mean that this floor gets tested again later this afternoon.

Beginning this week, the S&P 500 was flat ytd but the NASDAQ’s FANG+ Index of tech behemoths was up over 16%: mostly on the back of Netflix, Amazon, Twitter and Nvidia rocketing this year (+67%, +33%, +33% and +26% respectively). But with yesterday’s performance the S&P is now down -1.85% ytd and the FANG+ Index trimmed its 2018 gains to below 10% after falling over -5.6%: its largest hit on record.

These large tech companies aren’t as homogenous as some may think, as shown by their wide range in recent performance; but typically the ytd outperformers fared the worst yesterday with the aforementioned falling -6%, -4%, -12% and -8% respectively. Twitter fared particularly badly yesterday, as short-seller Andrew Left perfectly timed his change of views on the company in a report detailing his belief that ‘everything's changed’ for the company’s outlook.

Tesla was also an outlier… in so much as it already had negative performance year to date. Following yesterday’s hit it is now down over -10% in just the first 3 months of 2018 - as investigations gain momentum, and Model 3 production loses momentum. Not only this but its stock is the most shorted stock in the US market with 30 million shares worth $9.4 billion being borrowed; so too are its bonds with a whopping 13.2% of its 5.3% 2025 issue being shorted according to IHS Markit.

Not that all this portents a tech-crunch, after all the FANG+ similarly fell -5.4% on 5th Feb 2016 yet is up over 150% since then! But it shows that the potential volatility of the stock market, and especially the tech sector, has teeth that many aren’t prepared to endure. Such signs of flight in negative news cycles points to weak fundamental support for current valuations. And with Easter approaching, and a shorter trading week, we may continue to see more volatile than usual in the days ahead.

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