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This tech stocks drop is different and could mean market decline ahead


Large-cap technology shares including the FANG basket crushed the market this year and drove hedge fund performance. But with the technology stalwarts faltering, what does that mean for the stock market?

“Some FANG stocks such as Amazon and Google/Alphabet have seen weakness before but usually it’s been company-specific and not broad-based. Typically, Facebook and Netflix have held firm. Not today. Something looks to have changed,” Fred Hickey, editor of High Tech Strategist, wrote in an email Monday.

Facebook shares declined 4.5 percent on Monday, its worst day since November. The drop followed the disclosure last week that the social media company will share information with Congress about suspected Russian-linked election ads.

Netflix shares fell 4.7 percent on Monday after a report that 21st Century Fox is adding more inventory to its FX+ streaming service. Investors may be concerned that content owners are pulling more content from the streaming giant.

It’s not just FANG — Facebook, Amazon, Netflix and Google-parent Alphabet. Apple has lost approximately $50 billion in market value since the company announced its latest line of products on Sept. 12 as investors worry over the strength of the new iPhone models’ “super cycle.”

Hickey believes it is not just fundamental news driving the sector lower, but it could be a reaction to the Federal Reserve’s announcement Wednesday to roll off its $4.5 trillion balance sheet.

“When the QEs were announced by the Fed, stocks jumped across the board before the actual buying occurred. We may be seeing the reverse happen following Wednesday’s Fed meeting when they announced QT [quantitative tapering],” he wrote.

So what does a falling technology sector mean for the S&P 500?

Using Kensho, a hedge fund analytics tool, we looked at what happens to the market during periods when the Technology Select Sector SPDR Fund (XLK) fell 5 percent or more in one month since the beginning of the bull market.

Since March 2009, a weak month for the technology sector is generally bad news for the market, according to Kensho. The study found the S&P 500 declined 17 times out of 18 instances the fund fell 5 percent or more in one month.

Bottom line: When tech stocks are falling, it’s been nearly impossible during this bull market for the S&P 500 to post a gain without them participating.

Technology shares, along with industrial and consumer discretionary stocks, share the highest correlation with the market.

Despite the recent declines, the FANG stocks are still doing well on a year-to-date basis with Facebook up 42 percent, Amazon up 25 percent, Netflix up 44 percent and Alphabet up 18 percent through Monday versus the S&P 500’s 12 percent return.

However, the big tech gains may be a sign of earlier excessive risk-taking by investors, which could mean a large reversal when the tide turns.

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