Investors are favoring Big Tech due to 'benchmark FOMO'

Big Tech continues to dominate much of investor focus on Wall Street as it continues to perform well, with Evercore ISI Research claiming Nvidia (NVDA) could become 10-15% of the weight of the S&P 500 (^GSPC).

RBC Capital Markets Equity Derivatives Strategist Amy Wu Silverman joins Catalysts to give insight why investors continue to focus on a couple of names in big tech rather than broaden out to different sectors.

"I really feel bad at some point for these investors because I think the investors overall have really wanted to do a trade that's essentially a bet on the broadening out of the market, so they want to look at energy, they want to look at these other sectors. But then at the same time, there's this this problematic benchmark FOMO," Wu Silverman explains. "And that's sort of what I started to call it, which is just when you have a few names doing all the heavy work for the indices and you're not over-allocated to it, then you're dragging your benchmark."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Nicholas Jacobino

Video Transcript

Analysts continue to raise price targets on in video.

The stock also keeps climbing to record highs, bringing the S and P and the broader market with it.

But should investors start worrying about hedging against any potential risks to the chip giant?

For more on this?

We bring in Amy and R BC capital markets, derivatives, strategist, Amy, great to speak with you and thanks so much for coming on.

So I'm curious, I mean, when 5% of companies are responsible for all of the market gains that we've seen so far this year, you gotta be a little bit nervous.

You say that the best hedge for one big tech name that we talk about all the time is another one which mag seven stock do you see as a potential stock that could benefit from any NVIDIA headwinds?

You know, it's interesting because you know, as we know the market really from a market weighted basis relative to an equal weighted basis has really, really outperformed.

And what's interesting is when you think about that from just kind of headline numbers, you don't see it, but it really is, this kind of one is doing well.

The other is going down.

It's like this paddling duck market, it looks calm on the surface, but violent rotations underneath.

And a lot of that just speaks to positioning.

So sometimes when you look at the institutional client base, when they're selling one of the mag seven, it's usually to buy the other.

And what we've seen recently in terms of positioning is that kind of diametric opposition has really been Invidia versus Apple.

So, you know, you've seen one outperform, it sort of hits the other and then when one is outperforming, you're taking profits from the other, that's not always the case, right?

They're not always the pair that just certainly has been the pair recently.

Amy when you talk about maybe what this signals more longer term, some of the other rotations that you have seen.

I hear in your notes, you talk about the top sector still being energy, the 2nd and 3rd real estate and consumer discretionary.

What have you seen just in terms of investor interest there and maybe what that signals just in terms of where we are going to see some of that strength down the line.

You know, I I really feel bad at some point for these investors because I think the investors overall have really wanted to do a trade, that's essentially a bet on the broadening out of the market, you know, so they want to look at energy, they want to look at these other sectors but then at the same time, there's this, you know, this is problematic benchmark FOMO.

And that, that's sort of what I started to call it, which is just when you have a few names doing all that, the heavy work for the indices and you're not over allocated to it, then you're dragging your benchmark.

So the issue is, I think a lot of these sectors, they look attractive, you know, we've done our sharp ratio studies which show how attractive they are on a risk adjusted basis.

But the issue is when you have that benchmark, FOMO, you know, you're much more concerned about dragging that benchmark and that unfortunately means all roads still lead to technology.

So we still see the f conversation and trade driving the market right now, Amy or are we starting to see a little bit of HED against just going all in on tech?

And if so where you see evidence of that?

Yeah, I think that's a really great question because it really speaks to a sentiment change that I don't think you could just get from looking at the top line of the market.

So I'd say, you know, for the first few months of the year, all we could see in the options market was FOMO and Momo, we saw that in historic call buying uh in the NASDAQ in the mag seven names just across the board, you know, unlike anything we've really seen in this kind of post COVID volatility regime.

However, that is changing.

So you are starting to see people pick up a few hedges.

Uh You're starting to see people even talk about hedging the mag seven that, you know, it's not what I would call historic the same way we saw on the calls, but the fact that it's part of the conversation to me does show a little bit of influence in the market and people sort of questioning how much longer this narrowness and breadth that is going to continue.

I mean, when you talk about some of those other factors outside of earning season, here we are, we have earnings season essentially behind us.

What is really going to drive some of that sentiment, some of that activity that you are seeing here over the next couple of months as we do have this lead up here to the election.

Yeah, you know, when you seasonally look at how Vicks behaves, for instance, just, just volatility in the markets, it's typically a quieter time, especially with earnings out of the way.

Obviously in early July, you're gonna get another kickoff of earning season.

But right now, I think people are focused on the US election debates.

I think they are of a lot of interest to investors.

And then right now kind of the political headwinds coming out of other elections, not in our own country but out of Europe, out of, you know, the Asian countries, they, they sort of have this tail wind to them for the US because the US has sort of been a flight to safety when there is uncertainty in other markets.