US tech selloff seen as removal of froth rather than a warning sign

Thursday’s megacap tech selloff is likely just some froth coming off a hot market rather than a portent of a larger pullback to come.

That’s the view of most market participants after the tech-heavy Nasdaq 100 suffered a 5.2% decline, its worst since March. Profit taking after a good run seems to be the consensus explanation. Robust purchases of downside hedges, the possibility for positive news on the US labour market and the potential for longer-term earnings growth, all suggest technology shares can remain supported.

Here’s the views of some market participants on the selloff:

Jobs and a holiday

“Yes, today was a bad day. Ripe for profit-taking, but even with the 3% to 5% drop markets are still at impressive levels,” said Larry Peruzzi, director of international trading at Mischler Financial. The monthly jobs report — a key data point amid Covid times — comes out Friday morning US time and that “could restart the rally” if it’s much better than expected, he said.

Volumes and engagement might be lower ahead of the Labour Day holiday in the US, which will keep markets closed on Monday, he noted.

The options are all right

“Many market narratives have focused on the low put/call ratios on some key big-cap tech and tech index levels as a sign of complacency,” said Michael Purves, CEO of Tallbacken Capital Advisors. “But while these put-call ratios reflect a bullish frenzy, Apple and Tesla being key examples, they don’t necessarily have to portend some enormous market vulnerability.

“Under-protected trending assets can have widespread implications that can bleed over into all assets — the financial crisis of 2008 being an extreme example of this condition,” he said. “But the data suggests that put buying has been robust, just not as robust as the call buying has been.”

Pivotal valuation point

Stifel Nicolaus & Co’s head of institutional equity strategy, Barry Bannister, offers a case for further gains in valuations — though he warned the path is fraught.

“The current market level is pivotal: The cyclically adjusted price-to-earnings multiple of the S&P 500 is knocking at the doorstep of the same point at which CAPE broke out in the last two years of the most powerful bull markets of the past century, the late 1920s and late 1990s,” he said.

“If CAPE does break out, the building (and inevitable bursting) of a bubble could make the market a ‘greater fool game’ challenge in the near-term and a modest return vehicle longer term,” he added. “The mega-bull case: Combinations of equity risk premium and 10-year TIPS produce much higher S&P 500 fair values.”

No tech wreck

“When it comes to the tech sector and the other online giants that have gained so much in the last few months, there could be profit taking as we head toward the US presidential election in November,” said JPMorgan Asset Management strategist Kerry Craig. “Negative headlines on potential regulatory and tax changes are likely to add to investor unease in a market with elevated valuations.

“However, this is unlikely to be a repeat of the tech wreck of the late 1990s, given how much the market and sector have changed,” he added.

“While tech sector valuations are elevated, we are also mindful of the earnings and revenue potential in the coming years from areas like cloud computing and artificial intelligence, as well as how many of these companies will benefit from the shifts in corporate attitudes toward physical workplaces,” he said.

Still, other strategists pointed to areas that continued to concern them.

Vaccine downside

“If more positive announcements regarding a viable and effective vaccine are forthcoming, as expected, selling in technology could continue as funds raised will be allocated across the sectors most closely associated with the other side of the pandemic,” said Quincy Krosby, chief market strategist at Prudential Financial.

Volatility key

Rising volatility and correlation could trip markets, according to Olivier D’Assier, head of applied research for Asia-Pacific at Qontigo.

“There is a lot of short-term liquidity in the market now because of all the quantitative easing programmes, but this liquidity has a low risk tolerance, he said. “If volatility rises and correlation takes away their ability to construct a well-diversified portfolio, they will pull it out of equities and back into liquid, safe treasury bonds.”  — Reported by Joanna Ossinger, (c) 2020 Bloomberg LP