Bears Target Tech Rebound Amid $8.3 Billion ETF Outlow

By Namitha Jagadeesh

Traders are betting a recovery in technology stocks will fizzle on concern global economic growth fails to justify valuations.
While the Nasdaq 100 Index climbed 2.8 percent in two days, after reaching a four-month low, the rebound followed six weeks in which investors pulled $8.26 billion from an exchange-traded fund tracking companies from Google Inc. to EBay Inc. Bearish options on the ETF cost the most in more than two years relative to bullish bets, data compiled by Bloomberg show.
Nasdaq 100 stocks traded at the highest prices relative to earnings since March 2010 last month. That, plus concern that a stronger dollar will lower revenue for
U.S. companies, makes technology shares more vulnerable to a selloff, according to Notz, Stucki & Cie.’s Pierre Mouton, who is reducing holdings of Microsoft Corp. and Intel Corp.
“For many software, cloud and social-network companies, valuations had become too rich,” said Mouton, who helps oversee $8 billion as a portfolio manager in Geneva. “Many weak hands must have bought these companies quite late in the rally and have now reached their loss-resistance point.”
Technology stocks dropped last week as Google reported third-quarter profit and revenue that missed estimates, while online marketplace EBay forecast fourth-quarter sales that fell short of analysts’ predictions. Netflix Inc. tumbled 21 percent as it reported slower subscriber growth, while facing the new challenge of HBO’s plan to offer online streaming.

Biggest Decline

Semiconductor companies dropped the most among 24 groups in the Standard & Poor’s 500 Index this month after Microchip Technology Inc. said slowing demand in China damped quarterly sales and warned of an industry-wide correction.
The rising dollar also hurts export-oriented technology companies as it reduces the value of foreign-currency earnings when they are repatriated back to the U.S. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, rose to a four-year high earlier this month. Apple Inc., Microsoft and Google, which have the biggest weightings on the Nasdaq 100, generate half or more of their revenue from markets outside the U.S., data compiled by Bloomberg show.
About $4.57 trillion has been erased from global equities since September amid growing concern that a potential recession in Europe will undermine growth as the U.S. Federal Reserve winds down stimulus.

Nasdaq Valuation

Nasdaq 100 shares traded at 22.9 times reported earnings yesterday, near the highest valuation since December 2009 relative to the S&P 500, data compiled by Bloomberg show.
The decline offers buying opportunities among technology stocks, according to Storebrand Asset Management’s Espen Furnes. His firm owns shares of Google and Apple, which last week debuted a payment service for iPhone users and unveiled new versions of its tablets and personal computers.
“Fundamentally, I still am bullish on tech stocks,” said Furnes, who helps oversee $85 billion in Oslo. “Selective stock picking is important. Apple has good momentum now with new products. Also, mobile technology stocks still have exciting growth ahead.”
Options pricing in a 10 percent decline in the Powershares QQQ Trust Series 1 (QQQ) ETF cost 8.9 points more than those betting on a 10 percent increase last week, according to three-month implied-volatility data compiled by Bloomberg. That was the most since September 2012. Two of the three most-owned contracts on the ETF were bearish.
Investors concerned about future economic expansion are selling tech shares because they are more at risk in periods of slow growth, according to Robert Pavlik, who helps oversee $4.5 billion as chief market strategist at Banyan Partners LLC in New York. Internet stocks and biotechnology companies are considered to have higher volatility, or beta, than the broader market because their earnings potential is hard to predict.
“The selloff in tech stocks has a lot to do with risk-off trades,” Pavlik, said by phone. “Technology is a high-beta space and doesn’t have the ability to weather economic issues as some other sectors do. People are getting nervous.”