Back to the Future

Last week the NASDAQ Composite hit a new high for the first time in fifteen years, the Shiller P/E touched its highest levels since the tech boom and both Microsoft and Amazon were up sharply on earnings or in true 90’s style, lack of earnings in the case of Amazon.  With a two-term democrat in the White House and six years into a bull cycle, does anyone else feel like they’re stuck in a time machine and reliving all of the highlights of the past bull market?

To see if we’re doomed to repeat the lessons of the past, we did a deep dive into our Quant Movers hoping to discover if that old adage about those who fail to learn from history has definitely been taken to heart by investors in 2015.

We noticed a conspicuous absence of technology funds in either the Behavioral or Fundamental categories this week and while heartening at first glance, checking out the “Fund Statistics” for two of the largest tech funds quickly changed our opinion.  The reason the Technology Select Sector SPDR Fund (XLK) and Vanguard Information Technology Index Fund (VGT) didn’t make the short list was that investors had already began putting new capital in the funds prior to the start of earning season with XLK adding $55 million and VGT pulling down nearly $230 million which starting on March 27th sent their Behavioral scores soaring and their Fundamental scores crashing.  The overall effect on their ETFG Quant scores has been mixed with XLK declining from 64.6 on March 27th to 55.70 on April 24th, largely due to the decline in the fundamental score although the behavioral score has become decidedly more choppy. And choppy definitely describes the daily changes in the score for VGT as the lack of telecom exposure held by rival XLK offers investors a more pure play tech sector darling.

If the shade of 1999 makes you want to sit down and watch “Office Space” you can stop yourself right there because at least when compared to the other select sector SPDR’s, XLK isn’t the most richly priced or sought after fund, that title continues to be held by the Consumer Discretionary Select SPDR (XLY).  Not only does XLY have the highest behavioral score by based on both momentum and sentiment but XLY is easily the most richly priced fund.  Tech stocks represented by XLK have a similar fundamental score to the utilities where XLU also outperformed the broader market last week.  Some of that rich pricing is surely due to XLY’s large position in Amazon (6.32%) but large allocations to Disney, Starbucks and Netflix have added nearly as many basis points to the returns (although those four stocks make up the bulk of the year to date return.)  One thing that XLK does have going for it relative to XLY is a larger relative short interest so short sellers beware.

But for those investors who’ve decided that history might just repeat itself and looking for a single fund that offers the opportunity to short Amazon and Microsoft, our ETFG Equity Market Grey Reports says that you are out of luck.  While there might be an ETF for nearly every fancy, no one has yet to develop a nifty fifty of the internet-era darlings although the First Trust Dow Jones Internet Index Fund (FDN) might come closest.  Besides offering a 8.91% weighting in Amazon, FDN also has large weightings in some of the year’s top performers like Netflix (4.71%) and Twitter (3.9%) that have helped put in near the top of the tech heap in 2015 with a YTD return of 11.56%.  And if you want late 90’s style pricing, you’ve come to the right place as our ETFG scanner shows the fund’s P/E ratio is trading close to the highest it has ever been.  But investors looking to short FDN might be early to the party as the short interest is in its historical lowest quartile although the contrarians out there interpret that as meaning there’s less gas in the tank for another push higher.

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