Market Basics: Tech Stocks

The last quarter of 2018 has been far from favourable for the majority of tech stocks. One example was the DOW plunging approximately 300 points and falling below the 200-day MA (short form of Moving Average), which is an indicator a large number of traders and algorithms use to take their positions.

The S&P 500 further went through multiple corrections and has been categorised as going through its worst month since 2009. Nasdaq experienced similar fluctuations, having never gone through an intraday plunge of this kind of amplitude since 2011.

As one can see from the three price graphs of tech companies depicted below, they follow almost identical patterns: climbing until September, only to plunge and experience a small upwards correction.

(Amazon Stock Price 3Y, source: Marketwatch)

(Alphabet Stock price 3Y, source: Marketwatch)

(Netflix Stock price 3Y, source: Marketwatch)

What were the key drivers behind the crash?

Three reasons can be identified which are at the core of the tech stocks plunge:

1.       Falling valuations.

2.       Trade tensions between the US and China.

3.       Falling global demand after a rather long expansion period.

Falling Valuations

Tech stock valuations have been developing at unusual, and arguably unsustainable growth rates during the last years. Hence, any sudden drop was likely to be of sizeable impact to financial markets. Consistent with this prediction, analysts consolidated the data of approximately 1700 tech firms and indicated that their combined market value was down approximately $1 trillion in October (Reuters, 2018). Prior to this crash, the same 1700 tech stocks’ market value had doubled since 2013. Specifically, the FAANG stocks (Facebook, Amazon, Netflix, Alphabet’s Google) had experienced above-average growth, increasing their market value by more than 350% since 2013. The drop in share prices can therefore be perceived as a market correction, following an overbought condition pertaining to tech stocks.

(Price chart Amazon 1W candles, source: markets.com) 

To conclude this first driver, the RSI (Relative Strength Index), which is used to indicate an overbought (>70) or oversold (<30) condition has barely been below the 50 mark since 2016. This is commonly viewed as yet another accumulation of downward pressure on stock prices. This strong indicator of oversubscription partially led to the September 2018 correction, in an effort to ease downward pressure on tech stock prices.

Trade Tensions Between Washington and Beijing

The trade war between the US and China has had a considerable impact on investor confidence. A J.P. Morgan economist team writes: “We forecast that the US imposes an additional 25% tariff on virtually all goods imports from China early next year. This will drag materially on activity in China and could accelerate the decline in global business confidence now underway’’. Along a similar sentiment, Tim Cook (CEO Apple Inc.) has even gone to the extent of blaming the trade war for Apple’s current internal issues.   

Falling consumer demand

Falling investor confidence due to downward pressure and the US-China trade war led China to have the worst growth in 28 years. The three most common drivers of the Chinese economy are infrastructure, exports and property. While infrastructure is holding strong, economists are witnessing shortfalls in exports and property. The exports part of the plunge can be explained by the often mentioned trade war.

Analysts predictions for tech stocks

Aquis Exchange: 2019 will be the year for cryptocurrencies to either boom or crash completely,

                            There has to be room for more understanding and regulation for the

                            sector to recover from the bubble burst and come to a steady level.

OpenFin Europe: As the financial and retail sector are moving further and further into

                             digital operations, analysts from OpenFin Europe believe security

                             is a safe long-term investment with regulators such as the UK’s

                             FCA putting increasingly strict regulations on online business and

                             transactions.

Liquidnet: The CEO and founder of Liquidnet believes that AI should be a meaningful

                  position to take as more and more businesses are implementing artificial

                  intelligence processes in their operations.