Last week, the NYSE Fang+ index fell into bear market territory (a fall of 20 per cent). The FAANG stocks that dominate the index – Facebook, Amazon, Apple, Netflix and Google – have now seen more $1 trillion wiped off their value since their respective peaks. For the first time, each of the five are now in bear markets. The sheer size of the FAANGs – their recent losses exceed the value of the entire Spanish stock market – means they cannot be ignored. Technology recently accounted for more than a quarter of the S&P 500, its highest sector weighting since the dotcom bubble in the late 1990s. This outsized weighting means it will be "very hard" for indices to rally in 2019 if tech weakness persists, Datatrek strategist Nicholas Colas cautioned last week.
The tech weakness highlights how the current correction is a different and more serious one than the January-February selloff. That was a healthy, run-of-the-mill correction after a period where stocks had rallied too far, too fast, with tech stocks leading the recovery effort once the excess had been cleansed from markets. This time, tech stocks have gone from leaders to laggards, with investors desperately rotating out of high-flying names in what is looking like a classic growth scare.
Bearishness outbreak as ordinary investors throw in the towel
Contrarian ears will perk up upon hearing that the ongoing correction is causing a growing number of ordinary investors to throw in the towel. There are now almost twice as many bears (47 per cent) as bulls (25 per cent), according to the latest American Association of Individual Investors (AAII) poll.
Bullish sentiment had remained relatively steady during the October selloff but it has plunged over the last few weeks. The last time bearishness was this widespread was at the major market bottom in early 2016, while last week’s reading was only just below levels the AAII considers to be “extraordinarily high”. Contrarians should not get too excited just yet. Firstly, sentiment can certainly worsen from current levels. Secondly, too much should not be made of one indicator, and other sentiment metrics suggest we are not witnessing the kind of stomach-churning fear often seen near market bottoms.
Still, the AAII poll suggests investors are increasingly jittery – good news for those who like to heed Warren Buffett’s advice to buy when others are fearful.
Does plunge in valuations augur well for stocks?
Markets have been rocky lately, but the scale of the retreat has nevertheless been relatively modest, with the S&P 500's 10 per cent correction meaning it is now flat in 2018. More notable, perhaps, is the fact that market valuations have contracted at a rate rarely seen in recent decades. A combination of soaring earnings and flat stock prices has resulted in the S&P 500's price-earnings ratio shrinking by 17 per cent – the third-biggest drop in valuations since 1991, notes Bloomberg, and almost on a par with that witnessed during the global financial crisis in 2008.
Bulls will be cheered by the fact stocks are cheaper and can point to recent UBS data showing indices have historically averaged excellent returns (16 per cent) in the year following previous significant contractions in valuations. However, bears could argue this time is different; valuations have merely retreated to historical norms in 2018, whereas they tended to fall to lower levels prior to earlier rallies. For what it’s worth, UBS expects the usual historical script will play out, with stocks gaining almost 20 per cent by the end of 2019.
Hedge fund manager says sorry after losing the lot
It's not nice to laugh when someone loses a fortune, but there was no shortage of sniggering in the financial world last week after hedge fund manager James Cordier posted a teary 10-minute video to YouTube apologising to his investors following volatility in natural gas markets that wiped out his $150 million fund.
Cordier’s pain was palpable, but it probably wasn’t a good idea to wear cufflinks and a a Rolex-lookalike watch, and it definitely wasn’t a good idea to address his client in the south of France (“my wife and I were certainly looking forward to joining you in the French Riviera”).
His boating metaphors – “I’m sorry that this rogue wave capsized our boat” – were also misplaced.
Cordier liked to sell options. Most of the time, you make steady money with this strategy, collecting a premium when prices don’t move heavily against you. The reason everyone doesn’t sell options, however, is because you risk losing all your money and more if market prices go wild, as they sometimes do.
Cordier's book on the subject – The Complete Guide to Options Selling, a "clear and engaging guide" which "helps you enter the market with the confidence you need and generate profits with a consistency that may surprise you" – might need a new title and an extra chapter or two.
