If you think the tech stock selloff is over, don’t be so sure. While the Nasdaq and mega-cap tech stocks rose on Tuesday after a three-week selloff, they could plunge further. The tech stock selloff isn’t over yet because investors aren’t scared enough, but they will be soon.
MKM Partners strategist JC O’Hara said the steep tech stock selloff could continue as sentiment for high-flying names could turn even more pessimistic.
Shares of Facebook, Amazon, Apple, Netflix, and Google-parent Alphabet (FAANG stocks) are all down more than 10% for September. These sharp declines come amid valuation concerns for the group that led the market rebound in late March.
Despite these large losses, activity in the options market suggests that investors are using this decline to increase their positions in these stocks. O’Hara said this lack of fear could indicate more losses are coming for the group before they can begin to recover.
There has been a sizeable pullback in the sector and in individual names, but a missing piece to a tradeable low is ‘Investor Fear’. We believe investors are still looking to ‘buy the dip’. If that is the case, the market will continue lower until tangible Fear is present.
Despite the worst pullback in months, open interest in bullish calls remained high for tech giants like Apple and Facebook.
O’Hara pointed out that before tech stocks recent difficulties, the put-call ratio of an index that tracks FAANG stocks was less than 0.6. This signaled that traders were too bullish on these names and therefore made them more susceptible to a sudden pullback.
A put-call ratio measures the number of puts bought by traders in a stock or index relative to the amount of calls bought. A higher put-call ratio signals that investors are bearish and a low ratio indicates excess enthusiasm on the part of traders.
The put-call ratio has climbed this month to 0.6449 and no longer signals “extreme greed” from traders in tech stocks. However, the ratio remains well below 0.85, the level that indicates overly bearish sentiment in these names.
O’Hara believes technology will regain leadership over the long term but isn’t convinced the tech stock selloff is over.
FAANG stocks were trading at very high levels before the September selloff. They were forming a bubble that finally started to pop at the start of this month. They have now more attractive valuations but are still expensive compared to other sectors.
Morgan Stanley’s Mike Wilson said deeper losses may be ahead as the selloff has yet to dispel the positive sentiment that has bubbled up in recent months during the historic rally.
Both the S&P 500 and Nasdaq 100 closed below their 50-day moving averages after enjoying a massive rally. The next key market support level is the 200-day moving average, which represents 5% and 12% downside potential for the S&P 500 and Nasdaq 100 indexes, respectively, based on Monday’s closing prices.
While Morgan Stanley sticks to its view that stocks are in the early days of a new bull market, the tech-heavy index remains particularly vulnerable to continue its correction towards the 200-day moving average.
Speculation needs to be wrung out before the bull market can continue.
Based on the CNN Fear & Greed Index, investor sentiment has taken a hit. The sentiment indicator closed in neutral territory on Monday with a reading of 51, a notable drop from the previous week-long reading of 59, which is seen as greed territory.
So, we could see another tech stock selloff in the short-term.
JPMorgan Asset Management global market strategist Jack Manley says tech stock pullback is a ‘blip’ amid outperformance. Watch the video below:
As growth perspectives of FAANG stocks remain excellent over the long-term, their prices should be higher in 12 months. Bernstein sees Amazon hit $3,400 in 12 months, which is about 10% higher than the current price.