Bassanese Bites: Tech tantrum – September 07 2020

Global markets

After six positive weeks in a row, U.S. equities suffered an overdue pullback last week, driven by the high-flying tech sector. This appeared to reflect the combination of Tesla surprisingly being excluded from the latest S&P 500 Index re-balance, and revelations that a major Asian tech investor, SoftBank, had been a huge buyer of call options within the U.S. tech sector in recent weeks.

Given some of the recent surge in Tesla’s price (up 400% this year) had reflected expectations it would soon be included in the S&P 500 Index (thereby triggering forced buying by index and index-hugging fund managers), its exclusion may well take some further froth from its valuation over at least the short-term.

SoftBank’s buying also has sparked fears that the recent surge in tech prices is somewhat artificial and could be vulnerable if this buying ceased – or worse, was soon reversed.

Either way, as seen in the chart below, single U.S. stock call-buying volumes – which include large retail investor activity – have surged over recent months, perhaps helping explain why some of the largest-cap companies in the world (such as Apple, Amazon, Microsoft and Alphabet) have bobbed around like small cap stocks over recent times.

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