Thursday , August 16 2018

Hedges get test as $300bn FAANG surge continues

Bloomberg

The world’s favourite stocks fought through to their seventh rally in nine weeks, though not without landing a few blows on traders.
For about 24 hours on Thursday and Friday, losses in the FAANG block looked liable to snowball, bringing back memories of a similarly out-of-the-blue lurch almost exactly a year ago today. But the nervousness abated, possibly aided by precautions traders have taken to lock in gains that are again approaching historic dimensions.
More than $300 billion has been added in six weeks to the group, comprising Facebook Inc., Amazon.com, Apple Inc., Netflix Inc. and Google parent Alphabet Inc. But along with the rally has come a jump in the price of bearish equity options on Nasdaq 100 stocks, a sign of brisk demand for contracts that act as insurance should the rally falter.
Owning insurance has looked prudent at various time this week as everything from emerging-market rumblings to demand scares caused stock momentum to stall. Add trade tensions and a strengthening dollar, and it’s no surprise investors are on edge after FAANG shares rose twice as much as the rest of the market since May.
“That’s one reason why the closer look at tech started to occur,” Matt Schreiber, president and chief investment strategist at WBI Investments, said. “Some of those are multinational corporations and that could get slowed down.”
It’s testament to the power of the recent rally that, even with February and April’s selloffs, the FAANGs are having almost as good a year in 2018 as they did in 2017.
An index tracking the group is up 34 percent year-to-date, compared with 33 percent a year ago. They were just listed as the world’s most-crowded trade for a fourth consecutive month, according to Bank of America Corp.
They made the list last year, too, before a rout on June 9 pushed large caps to post the biggest selloff since 2008 relative to the rest of the market.
Last year’s rally pushed the Nasdaq 100 Index’s 14-day relative strength index above 70, which some technicians see as a sign the index is overbought. The measure was also above 70 earlier in the week, though it’s since slipped below it, something chart watchers consider bearish. The cost of three-month puts versus calls in the Nasdaq ETF is hovering near this year’s high.
On a total return basis, tech stocks have outpaced the rest of the S&P 500 by more than 2-to-1 in the last five years, according to Leuthold Weeden Capital’s Jim Paulsen. The ratio rises to 3 over the last two and years and stands at 4 over the last 12 months.
Missing the rally has been costly. The $306 billion surge in the FAANGs in the last six weeks made up a third of the roughly $808 billion surge in the total value of the S&P over the same time. In the meantime, the market cap of a tech-heavy Nasdaq Composite Index has risen to about 49 percent of that of the S&P 500, surpassing the dot-com levels.
At 19.8 times next 12 months’ earnings, the Nasdaq 100 Index trades at a 19 percent premium to the S&P.
“Tech has outperformed and is expensive in aggregate by almost every measure,” said Matthew Litfin, portfolio manager of the Columbia Acorn Fund at Columbia Threadneedle Investments.

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