Editorial: Tech Stocks Are More Painful: Jeff Mills

Investors should be able to take advantage of the bullish momentum of tech stocks, at least for the next few months.

In my last post on the subject of February 4thThe point was, “The rule of relative rule by technology has come to an end.”Technical department measured by XLK ETFs followed S & P 500 The following month it increased by about 6% and the growth rate decreased by more than 14% over the same period.

This does not mean a winning lap. It’s far away from it. The one-month performance degradation rarely meets the criteria for loss of advantage. In addition, the weaknesses of tech and growth stocks have recently begun to reverse, regaining about half of their initial slump.

With stocks like Apple, Facebook,and Amazon It has fallen to a 200-day moving average. What’s next? Is technology ready to make a comeback, or is this just a pause along the path of further performance degradation? I think it’s the latter.

This is not your grandfather’s momentum

Technology stocks have become synonymous with momentum in recent years.Today, technology accounts for nearly 35% of what is widely tracked. iShares Momentum ETF (MTUM).. This will change soon.

MTUM will rebalance in the last week of May, and the weight on technology could be halved. In the estimate, Finance, Consumer discretion, And industry It has the highest weight, which can attract additional flows to these sectors.

This simple reconstruction is another catalyst that further degrades technology performance. Whether it’s a passive ETF or an actively managed strategy, those who want to be exposed to momentum will, in principle, own less technology and more value. In fact, given the heavy technology weights of most indexes, every 1% rotation from the “growth and defense” sector results in an increase of almost 3% to the “circular” sector.

Difference in evaluation: There are almost no dents

This year’s value outperformance simply brought the price-earnings ratio of the technology-intensive growth index back two standard deviations above normal. There is a long way to go before the valuation gap normalizes.

Interest rates: (short-term) technology opportunities

Interest rate movements were the main driver of relative performance between growth and value.

On days when interest rates are rising, growth and technology are struggling compared to value and circulation. I think it’s likely that interest rates will level off in the coming weeks, allowing us to adjust for oversold situations for certain tech names.

First, interest rate differentials between government bonds and many international government bonds are beginning to attract foreign buyers to US debt. European and Japanese buyers can earn an additional 1.2% by buying 10-year US government debt and 10-year foreign currency or government bonds, even after adjusting for currency risk.

This increase in demand could help reduce US interest rates over a period of time. In addition, sentiment about US Treasuries has become extreme. This is usually a good opposite indicator.Bearish bond investor percentage (bet rate rises) is 90 yearsth It is a percentile, with a 6-month rate of change in 10-year yields of Percentile.

Normalization of emotions will be another headwind for rising interest rates in the short term. With some big tech names in tech support and a weak flow of investment in technology (measured by XLK), performance leadership can be reversed in the short term as interest rates rise momentum.

However, it is unlikely that it will continue. Interest rates should rise as foreign economies begin to step up their vaccination efforts and the economies resume more fully, as these bond markets anticipate higher growth and inflation.

Interest rate inequality should narrow, US debt should become relatively unattractive to foreign buyers, demand should fall, prices fall, and Treasury interest rates rise. In addition, the Federal Reserve has not yet opposed rising long-term interest rates, 10 year yield From 2.0% to 2.25%, you won’t run into technical resistance.

Taken together, US interest rates should rise again as we move into the second half of this year, creating a lasting headwind for the relative performance of technology.

Not everything is bad

It’s important to remember that this is a relative performance story, not a technology crash or burning story. The stock market today remains very broad, with 96% of S & P 500 stocks above the 200-day moving average. The last time I saw this high was in late 2009. And Technology Being late, 90% of tech stocks are on the rise.

History has shown that interest rates and stock prices can rise together. Prices and even tech stocks can rise together (see 2013 for an example). But in games of relative investment performance, I think technology continues to lag behind.

Disclosure: Jeff Mills company Bryn Mawr Trust owns Apple.


Editorial: Tech Stocks Are More Painful: Jeff Mills

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