Why Oppenheimer Is Ready to Catch Falling Knife of Tech Stocks

Buying stocks that appear to be in the middle of a skydive is often referred to as “catching a falling knife” because of the obvious danger involved.

This morning Oppenheimer & Co. technical analysts took out the catcher’s mitt and positioned themselves squarely under the giant cleaver that is technology stocks, saying last week’s worst-performing industry is an attractive opportunity.

First, let’s get a sense of how fast that knife is moving. Technology companies in the Standard & Poor’s 500 Index sank 2.2 percent on April 4, the worst drop in almost a year, to cap a second straight weekly loss. The group dropped as much as 0.6 percent today before paring losses. Shares of Pandora Inc., Twitter Inc., Netflix Inc., Amazon.com Inc. and Facebook Inc. are all down more than 20 percent from highs earlier this year.

While the exact cause of the retreat is somewhat mysterious, it is also somewhat obvious. Investors began dumping bets on earnings growth from so-called momentum stocks in late February and early March, and rotated into shares without such lofty valuations.

If you prefer the heavier jargon explanation, Deutsche Bank AG explains that “equity beta positioning has moved towards neutral.” When a stock has a higher beta it means it tends to rise faster than benchmark indexes during rallying markets, and fall more during down markets.

Beta Trades

This included not only computer-related stocks but also biotechnology shares and companies with smaller market values. The Russell 2000 Index, made up of companies with an average market value of about $1 billion, is down more than 5 percent from its last record on March 4.

Many funds that borrow money to buy stocks were forced to cut their bets on higher beta, according to a Deutsche Bank report dated April 4.

So, as is often the case, stocks with higher beta are the “knife” that may be attractive to try to catch at some point. Here’s one of Oppenheimer’s reasons for doing so with technology shares: the better performance of a basket of shares in which each company is given an equal weight, rather than the standard procedure of giving larger weightings to larger companies.

The Guggenheim S&P 500 Equal Weight Technology ETF was up 2.8 percent this year as of the start of trading today. The S&P Technology Select Sector SPDR Fund, an ETF that weights stocks by market value, was little changed. This, to Oppenheimer, signals the potential for “broad-based sector leadership.”

Another reason is simply seasonality: technology shares tend to perform better than the S&P 500 between April and August, according to Oppenheimer.

Catching a falling knife can be a good trick to outperform the market. Or a good way to lose a thumb.

Before it's here, it's on the Bloomberg Terminal.