Will The Tech Stock Selloff Continue?

Will The Tech Stock Selloff Continue?

over 3 years ago2 mins

Mentioned in story

After more than five months of almost uninterrupted gains, US tech stocks took a dramatic two-day tumble at the end of last week. Now, with the US markets due to reopen on Tuesday following the Labor Day weekend, investors are wondering what’ll happen next.

What does this mean?

Tech stocks have led the wider market higher this year, with the closely followed QQQ exchange traded fund (ETF) up by a third.

QQQ ETF vs S&P 500 (source: Koyfin)
QQQ ETF vs S&P 500 (source: Koyfin)

That rally has lured adventurous investors (including Japanese giant SoftBank) into purchasing call options – contracts that allow you to buy a stock at a certain price on a certain date in the future – on popular tech names like Amazon and Tesla. Or, perhaps, those adventurous investors’ options bets have even fueled the stock market’s gains rather than just following them. As ever with markets, it’s almost impossible to separate correlation and causation.

(Source: SentimenTrader)
(Source: SentimenTrader)

Either way, one notable feature of recent market action has been the large number of small-value options trades – suggesting that small retail investors (the likes of you and me) have been heavily involved.

(Source: SentimenTrader)
(Source: SentimenTrader)

Why should I care?

It’s become received wisdom that retail traders lack the clout to move global markets in any serious way nowadays – and that only the actions of professional money managers with billions at hand really matter. But the unusual trading conditions of recent weeks – with investors driving up the price of options even as stocks climbed – have made some commentators revise that opinion.

Academy Securities, for one, wrote last week that smaller options trades “may have a surprisingly large impact on prices” as so much market volume nowadays consists of middle men keen to handle a lot of transactions without actually taking a position on whether stocks will rise or fall. In addition, the current concentration of retail interest in a few cult stocks – like Tesla or Plug Power – may be magnifying their impact.

“In a world where volumes are distorted by the frantic trading of algos, any real order flows may have a surprisingly large impact on prices,” according to Academy Securities.

So, with that in mind, it will be fascinating to see whether bullish smallfry or the traditional larger market players set sentiment in the coming days.

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