US technology shares that powered stock markets to records this summer dropped for a third consecutive session on Tuesday, with the Nasdaq Composite suffering a technical correction as it slid 10 per cent from last week’s high.
The index declined 4.1 per cent in a sell-off that gathered momentum in the hour before the closing bell.
Two-thirds of the stocks in the Nasdaq Composite lost ground amid concerns about the valuations of technology companies that have soared despite the economic fallout from the coronavirus pandemic.
Shares of Tesla fell 21 per cent and biotech company Moderna, which is developing a coronavirus vaccine, slid 13 per cent.
The broader S&P 500 was down 2.8 per cent, led by declines in shares of technology companies including Apple, which was off nearly 7 per cent.
Investors have also expressed concerns in recent days about frantic activity in the options market. Trading volumes had soared this year, with SoftBank of Japan buying large quantities of options on tech stocks, a development first reported by the Financial Times last week.
The purchases and subsequent hedging by brokers helped fuel the August rally in the Nasdaq Composite and S&P 500, which is now dominated by several mega-cap tech companies.
"The bigger impact during the past few months has to be SoftBank with the amount of buying they did," said Jim Tierney, the chief investment officer of concentrated US growth at AllianceBernstein. "Any time you have someone buying the underlying stock or options, it creates upward pressure."
He added: “In the most richly valued names, there’s still more air to come out of the balloon.”
The three-day sell-off has coincided with an uptick in volatility and a rush by traders to buy put options, which can offer protection in a market rout because they give the holder the option to sell a share at a set price.
The ratio of put options to call options that traded on Friday soared to its highest level since June, according to exchange operator Cboe.
Europe’s main index, the Stoxx Europe 600, slid 1.2 per cent as shares in Frankfurt, Paris and Madrid all fell more than 1 per cent.
There was no "obvious external trigger" for the broad retreat from tech stocks, said Patrik Lang, head of equity and strategy research at Julius Baer. But he noted that such companies had been trading at high multiples of their earnings during the coronavirus shutdown, as consumers spend more time on screens and home-workers shift to using videoconferencing applications.
“In our view, this is a healthy correction, as the divergence between funky technology names and the rest of the market has recently reached extreme levels,” he said.
The Nasdaq Composite had risen by more than three-quarters between its March low and its peak last Wednesday, with valuations supported by enormous injections of liquidity into the financial system by central banks.
"Equities were priced to perfection," said Alexis Gray, investment strategist at Vanguard. "That was always going to be difficult to sustain when you have a disconnect between how markets are performing and what global economies are doing." – Copyright The Financial Times Limited 2020
