What’s behind the sell-off in tech stocks?


nasdaq-tech-stocks

The remarkable slide in tech stocks over the past month has helped erase modest gains so far this year for the S&P 500 Index (SPX) and Dow Jones Industrial Average (DJIA).

On April 4, the technology-heavy Nasdaq Composite Index (COMP) plunged 110.01 points, or 2.6%, its biggest one-day drop since February. The index is off about 2% on the year through April 7.

Nasdaq Composite

^IXIC Chart

^IXIC data by YCharts

The declines in tech stocks, especially social media plays, have been breathtaking. Some brand name companies, once high flyers, are way off from their recent 52-week highs. Twitter (TWTR) is down 42% and other big names LinkedIn (LNKD), Facebook (FB) and Tesla (TSLA) have experienced declines of 20% or more.

TWTR Chart

TWTR data by YCharts

What gives? A good case can be made that tech stocks as a group have simply been overheated for some time and long overdue for a pullback. FireEye (FEYE), a noted cybersecurity firm, had at its height quintupled its IPO price of $20 a share since listing last September. On April 7, it was trading at about $48 per share.

Illumina (ILMN), a maker of sophisticated gene-sequencing technology, advanced 173% in the year through April 3. At one point, Facebook hit a 52-week high of $72.59, or about double its initial offering price from May of 2012. Facebook shares have since fallen back to just under $56 per share.

The tech sector overall has fallen 15.1% from its 52-week high, one of the worst-performing groups and well above the 12.8% decline overall stocks from recent peaks, according to Bespoke Investment Group.

Bespoke Tech Drop.png

On the other hand, Barry Ritholtz points out that overall the tech sell-off is orderly and established tech names like Microsoft (MSFT) and Cisco Systems (CSCO) are holding up pretty well and are still up for the year.

“These are profitable, mature, dividend-yielding companies that give value investors something to hang their hats on,” he points out.

Also, says Ritholtz, a little perspective is in order. There hasn’t been a 10% correction in the MSCI World Index for more than 400 days–and counting. Indeed, the sharp reversal in the S&P 500 from a new all-time high has many investors wondering if we’ll finally get that much-anticipated 10% correction.

Ritzholtz Correction.png

The drawdown in tech and momentum names on seemingly no news also has investors questioning if this is simply a temporary cooling-off period for high-momentum stocks, or the start of something worse for the overall market.

“Two weeks of selling in the Nasdaq 100 Index, where valuations are double the rest of the market, has sent anxiety among options traders to the highest levels since the flash crash four years ago,” Bloomberg reports.

Photo credit: David Sim via Flickr Creative Commons

DISCLAIMER: The investments discussed are held in client accounts as of March 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

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Xavier Brenner
Xavier Brenner
Xavier Brenner has covered global market, business and economic trends for Interactive Brokers Asset Management since 2013. An experienced financial journalist, Brenner offers analysis and insights on the stories that matter to the discerning investor.