Here's What's Probably Behind Friday's Tech SlideBy
The more momentum a stock had, the more it plunged on Friday
Such uniformity suggests a wider strategy, says Soc Gen
Systematic, computer-driven strategies probably had a hand in Friday’s tech plunge.
On the surface, that stocks sold off wasn’t unusual. But U.S. technology mega-cap stocks were especially hard-hit, as the Nasdaq 100 Index tumbled 2.4 percent compared with a less than 0.1 percent decline in the S&P 500 Index. Everything from a Goldman Sachs Group Inc. note to a short seller’s tweet was blamed for the move.
At the same time, the uniformity of the selloff indicates something systematic was also at work, according to analysis from Societe Generale SA.
“The uniformity of the prices moves all on the same day indicates a market driven by price chasing momentum, with investors heading for the door all at the same time,” Andrew Lapthorne, global head of quantitative strategy at the bank, wrote in a note to investors Monday. “Such a uniform selloff strikes us as systematic, especially as the relationship weakens once you look at the broader and less liquid Nasdaq composite.”
The strongest indicator of whether a stock tumbled on Friday was momentum -- or the strength of a share’s gains over the past year. The higher a stock’s momentum ranking, the more it declined. This kind of proportionality is the hallmark of a strategy that unwound momentum positions, Lapthorne said.
To wit, Nasdaq 100 stocks with the most momentum plunged 4.4 percent Friday, compared with a 0.6 percent increase in those with the least, data compiled by Societe Generale show. The pattern was similar in the S&P 500 Index as well, and extended to stocks well beyond the newly christened FAAMG block of Facebook Inc., Amazon.com Inc., Apple Inc., Microsoft Corp. and Alphabet Inc.
Take Idexx Laboratories Inc., a veterinary diagnostic company. Though it’s a health care stock, it ranks twelfth among S&P 500 momentum shares, according to Bloomberg PORT. As such, it fell 4 percent on Friday, more than any FAAMG share.
For a quantitative investor pursuing a long-short momentum strategy, Friday’s price action would have been especially painful, since anti-momentum stocks also gained. A market-neutral version of momentum fell the most in more than three weeks, data compiled by Bloomberg show. That adds on to an already difficult month for equity quant traders, who’ve struggled with sluggish strategies in May.
“For price chasing investors, Friday’s plunge serves as a warning,” Lapthorne wrote. “When it’s time to head for the door, you better move fast.”