fbpx

Tech Hype Clashes with Ongoing Sector Rotation

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Over the course of the previous week, an enormous downturn was evident across the spectrum of tech stocks. The Top 25 Nasdaq-100 constituent stocks’ momentum largely flashed red:

The one bright spot was MercadoLibre with a very strong showing while Apple, Broadcom and Adobe effectively treaded water.

Meanwhile, the small-cap Russell 2000 was a mixed bag that – on balance – was a little less red:

Used-car dealership Carvana, a handful of medtech/biotech stocks – chiefly BridgeBio and Inozyne – and financial firms such as United Insurance and consumer lending platform Upstart – helped carry the week.

Giants and small caps aside, an all-important barometer for the American economy’s forward outlook is the S&P 500. Here too, the past week has been somewhat mixed:

Tesla, Advanced Micro Devices and Nvidia – stocks that are important constituents of America’s “Magnificent Seven” – had seen the most substantial impact on their momentum in quite some time.

The emerging fact pattern lends support to the notion that an attempt at sector rotation is in motion.

A Breakdown: Weighted vs Equal, Tech vs Ex-Tech

“Tech” has been steadily enveloping the growth story in American bourses for over two decades now. One means of separating and analyzing the effect of pronounced tech stock valuations on broad index/ETF performance lies in considering SPX versus the S&P 500 Equal Weight Index (SPXEW); the latter essentially “flattens” the effects of market capitalization to only consider momentum of all constituent stocks in unison.

In net performance from January 2007, i.e. just before the Global Financial Crisis (or “GFC”) till the 25th of July, both indices had delivered over 300% in returns, with the Equally-Weighted Index marginally leading by 3%.

The performance graph is highly suggestive of the notion that tech overvaluation and its contributory performance only came to the forefront in the final week of March 2020. However, it bears noting that while the Equally-Weighted Index leads in this broad window, there is some strength to the notion that pronounced valuation exists in tech: from the “market bottom” of March 24, 2020 till the present, the S&P 500 is up 17.4% while the Equally-Weighted Index is up 12%. This 5.4% “spread” is no small matter.

Going by calendar year across the broad window, it is evident that the relative overvaluation has seldom been a sustained cushion. Outside of 2008, the “spread” has an average of 3.33% and a median of 3.44% across complete calendar years.

Throughout the broad window, the YTD spread is second only to that seen in 2009 wherein the Equally-Weighted Index prevailed over the market cap-weighted index. This adds context to the cooling of momentum in the “Magnificent Seven” in particular and tech in general: it is absolutely in keeping with trends seen in the past.

Next: to consider the relative effect of tech overvaluation on the broad index, lets consider the performance of the Invesco S&P 500 Equal Weight Technology ETF (RSPT) versus that of the ProShares S&P 500 Ex-Technology ETF (SPXT) which doesn’t track an equally-weighted index but does exclude tech constituents.

Note: Effective on June 6, 2023 the Invesco S&P 500 Equal Weight Technology ETF’s ticker changed from RYT to RSPT. No other changes were made.

An early lead in SPXT’s lead in performance during the decline of Q3 2022 (which meant that it did better than its tech opponent) was largely erased in the burgeoning appetite for tech that has been in play since Q4 2022. However, it bears noting that the “ex-tech” has shown far less volatility than the “tech”.

An overview of the month-wise performance of the two instruments reveals that despite being equally-weighted, the “tech” instrument has generally outperformed the market cap-weighted “ex-tech” instrument. However, the spread in performance is trending towards a decline which is empirically neither novel nor unexpected.

In fact, in the month till date (MTD), the spread is trending towards settling close to the 1-2% range by the end of the month. This is another sign of tech overvaluation cooling off: the average of month-wise spreads in the past one year is 2.66% while the median is 1.88%.

In a market which has witnessed a gentle rise in retail investor volumes and optimism, institutional investors have continued to reign supreme – albeit with guarded tones. For the first time since July 2020, traded volumes of the Invesco S&P 500 Equal Weight ETF (RSP) – which tracks the SPXEW – had seen a surge well in excess of that in SPY in Q2 of this year.

In absolute terms, however, SPY typically sees volumes that are 15-20X that of RSP. In the current month, both have plunged.

In Conclusion

Three factors that will likely clash over the next few days. The first: a slew of upcoming earnings releases in both “tech” and “ex-tech”. Across the board, they can be expected to be “so-so”: overall positive but no massive standouts. In the past five years, even a “so-so” release would have triggered a strong rally manifesting for a quarter or even longer, given the large variety of players. In the present day, there are fewer players and they’re largely either “institutional” or “professional”. However, of the entire gamut of sectors, “tech” has tended to attract higher conviction from the clients of said “institutionals”.

The second factor is that sector rotation is both desirable and natural, thereby making it expectable. The affordability crisis is by no means over: easing of monthly CPI or not, the accrued elevation of costs for the average American consumer ensures that any over-optimistic forward outlook in any company with a broad consumer base would be (and should be) questionable.

The third factor is the relatively shallowness of the investor pool. Even a relatively smaller lot of trades are manifesting as a rally in intraday sessions with an inevitable correction either later on in the day or week. Simply put: while the market is looking upwards, there isn’t a whole lot of support for an overly-high jump.

Overall, there is a lot of potential for finding a slew of decently-priced securities outside of “tech” while Big Tech can be expected to continue to slide in valuation over the course of this quarter. What will confound this would be momentary spikes sparked by modest buy-ins in a shallow market.

For professional investors with a flair for tactical trading, there are a couple of Exchange-Traded Products (ETPs) to consider: SP5Y gives leveraged exposure to the upside of the S&P 500 while SPYS does the same on the downside. Similarly, QQQ5 gives leveraged exposure to the upside of the Nasdaq-100 while QQ3S does the same on the downside.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Related Posts

Price swings in equities are likely to become choppier despite a Fed pause in September.
Price swings in equities are likely to become choppier despite a Fed pause in September.
Violeta-540x540-1.jpg
Violeta Todorova
Price swings in equities are likely to become choppier despite a Fed pause in September.
Price swings in equities are likely to become choppier despite a Fed pause in September.
Price swings in equities are likely to become choppier despite a Fed pause in September.
AI is King while market breadth continues to grow.
AI is King while market breadth continues to grow.
Violeta-540x540-1.jpg
Sandeep Rao
AI is King while market breadth continues to grow.
AI is King while market breadth continues to grow.
AI is King while market breadth continues to grow.
Stocks retreat on surging bond yields, rising energy prices and slowdown in China.
Stocks retreat on surging bond yields, rising energy prices and slowdown in China.
Violeta-540x540-1.jpg
Violeta Todorova
Stocks retreat on surging bond yields, rising energy prices and slowdown in China.
Stocks retreat on surging bond yields, rising energy prices and slowdown in China.
Stocks retreat on surging bond yields, rising energy prices and slowdown in China.
FAANG+ faces some red flags as AI hype fades and China slowdown weighs on sentiment.
FAANG+ faces some red flags as AI hype fades and China slowdown weighs on sentiment.
Violeta-540x540-1.jpg
Violeta Todorova
FAANG+ faces some red flags as AI hype fades and China slowdown weighs on sentiment.
FAANG+ faces some red flags as AI hype fades and China slowdown weighs on sentiment.
FAANG+ faces some red flags as AI hype fades and China slowdown weighs on sentiment.
Price swings in equities are likely to become choppier despite a Fed pause in September.
Price swings in equities are likely to become choppier despite a Fed pause in September.
Violeta-540x540-1.jpg
Violeta Todorova
Price swings in equities are likely to become choppier despite a Fed pause in September.
Price swings in equities are likely to become choppier despite a Fed pause in September.
Price swings in equities are likely to become choppier despite a Fed pause in September.
AI is King while market breadth continues to grow.
AI is King while market breadth continues to grow.
Violeta-540x540-1.jpg
Sandeep Rao
AI is King while market breadth continues to grow.
AI is King while market breadth continues to grow.
AI is King while market breadth continues to grow.
Stocks retreat on surging bond yields, rising energy prices and slowdown in China.
Stocks retreat on surging bond yields, rising energy prices and slowdown in China.
Violeta-540x540-1.jpg
Violeta Todorova
Stocks retreat on surging bond yields, rising energy prices and slowdown in China.
Stocks retreat on surging bond yields, rising energy prices and slowdown in China.
Stocks retreat on surging bond yields, rising energy prices and slowdown in China.
FAANG+ faces some red flags as AI hype fades and China slowdown weighs on sentiment.
FAANG+ faces some red flags as AI hype fades and China slowdown weighs on sentiment.
Violeta-540x540-1.jpg
Violeta Todorova
FAANG+ faces some red flags as AI hype fades and China slowdown weighs on sentiment.
FAANG+ faces some red flags as AI hype fades and China slowdown weighs on sentiment.
FAANG+ faces some red flags as AI hype fades and China slowdown weighs on sentiment.

Search

[wd_asp id=1]

Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

Fed Hits Pause but Warns of More Hikes

Oil Prices Heading to $100

DAX Quiet Ahead of Looming Fed Decision

Currency Impact

Leveraged ETFs: What Are They and How Do They Work

Trading Strategies

Build your own ETP Basket
Leverage Shares: Europe’s top leveraged and inverse ETP provider.
Main ETP benefits
Common investor questions

Get the Newsletter

Never miss out on important announcements. Get premium content ahead of the crowd. Enjoy exclusive insights via the newsletter only.

Upcoming Webinar

How to Launch Your Own ETP on London Stock Exchange

by Raj Sheth

21.09.2023
9.00 AM GMT

Welcome to Leverage Shares

Terms and Conditions

Notice

If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

Risk Warnings

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Exclusion of Liability

Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

Leverage Investment

Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.

Cookies

Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2. 

By clicking you agree to the Terms and Conditions displayed.