Fed fuels tech volatility

01/07/22
  • Tech sector dropped sharply Wednesday after Fed news
  • Many high-profile names have retraced big portions of their 2020-21 rallies
  • CRM approaching 50% retracement of 20-month rally

One of the most obvious footprints left in the wake of Wednesday’s FOMC minutes release was the tech sector’s outsized decline. With the meeting details suggesting the Fed was going to be more aggressive about raising interest rates and unloading all the bonds on its balance sheet,1 tech and growth stocks—many of which tend to underperform when interest rates are high or rising—led the market to the downside: While the S&P 500 (SPX) fell 1.9%, the Nasdaq 100 (NDX) tech index slid 3.2%.

Many individual tech names, of course, did much worse, and some have been underperforming the NDX for months. Client-management tech company Salesforce.com (CRM) dropped more than 8% on Wednesday, and yesterday was still down more than 20% since October 19, a period during which the NDX actually squeezed out a net gain:

Chart 1: Salesforce.com (CRM) and Nasdaq 100 (NDX), 10/19/21–1/6/22. Salesforce.com (CRM) price chart. Declined more than NDX.

Source: Power E*TRADE (For illustrative purposes. Not a recommendation.)


Salesforce.com is one of many tech high-flyers from 2020 and last year that have seen their share prices significantly discounted the past several weeks. The stock closed at a record high of $309.96 in November, capping a 150% rally off its March 2020 lows. On Wednesday it closed 26.6% lower at $227.67—the lowest it had been since May 2021, which was right around the time it began the last leg of its rally (a 47% sprint to its all-time high).

Although the Fed has yet to actually hike rates, the market has already begun factoring in the shift to tighter monetary policy, as Wednesday showed. The process may be far from over, but the steep discounts in some individual tech and growth names may attract traders who see the potential for rebounds (at least temporary ones).

For example, although stocks had trouble rebounding yesterday, tech held up better than the broad market, and Salesforce.com actually managed to close higher.

Chart 2: Salesforce.com (CRM), 4/21/21–1/6/22. Salesforce.com (CRM) price chart. Approaching 50% retracement.

Source: Power E*TRADE (For illustrative purposes. Not a recommendation.)


Whether investors see upside potential in beaten-down tech names now or later—some CRM bulls may, for example, have noticed the stock hasn’t quite reached the 50% retracement level of its 150% rally off its March 2020 lows—one thing options traders will likely be monitoring is implied volatility (IV), which typically jumps after sharp stock sell-offs and inflates option premiums. Yesterday, for example, CRM’s IV was slightly above average for every expiration through September.

Deciding a stock may have fallen to an attractive buy level is one thing, but knowing when it’s a good idea to make a trade using options is another.

Today’s numbers include (all times ET): Employment Report (8:30 a.m.).

Today’s earnings include: Acuity Brands (AYI).

 

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1 Barron’s. Fed Minutes Point to Earlier, Faster Rate Hikes and More Aggressive Tightening. 1/5/22.

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