The tech sector in the US equity market has soared to astronomical levels this year. In terms of equity returns, the sector as a whole has risen more than double that of the S&P 500 so far this year. Most investors seem to have forgotten about the dot com crash and are placing their hopes on the next tech boom with things like Artificial Intelligence(AI), Cloud, Internet 2.0, e-Commerce 2.0, Self-driving cards, Internet of Things, etc. Retail investors and institutions have been piling into tech stocks in fear of missing out the boom. Long dead tech stocks like those in the semiconductor space have also shot up catch the tech craze among investors. For example, chip maker NVIDIA Corporation (NVDA) is up nearly 60% year-to-date.

Though most investors are bullish on the sector, short-sellers are betting that these over-hyped stocks are due for a fall. According to an article at Schroders today, of the 12 most-shorted stocks in the US market, 9 stocks are from the tech sector. From the article:

Short-sellers get their teeth into FANGs

Eight out of the 12 most-shorted stocks in the US are from the tech sector, and the short interest is growing, according to latest data from S3 Partners.

If, as is frequently argued, Elon Musk’s Tesla is categorised as a tech stock rather than a car manufacturer, that figure rises to nine out of 12.

Investors “short” a stock when they expect the price to fall.

The tech sector, which includes the so-called “FANG” quartet of Facebook, Amazon, Netflix and Google (now Alphabet), has outperformed strongly in recent years. As a result, valuations have risen to levels that make some investors (including our Value team) nervous.

Year-to-date as at 29 August the S&P 500 North American Tech Sector index has risen 22.5%, compared to a return from the broad S&P 500 of 10.6%, according to Bloomberg. Over three years the respective numbers are 64% versus 36%.

Past performance is not a guide to future performance and may not be repeated.

Source: Chart attack: Seven market snapshots from August, Schroders

The key takeaway for investors is that caution is warranted with investing in tech stocks at the current levels.

Disclosure: No Positions

Volatility remains low these days. So some investors may be complacent. Below is an interesting chart I came across recently:

Click to enlarge

Via Leide Smits @ Twitter

US Stocks have performed well so far this year with the S&P 500 up by over 10% based on price returns. However though US stocks can still go higher on a valuation basis, they are expensive relative to other major markets in the world including other developed markets. Though American stocks always commanded a premium over other markets, it does not mean they can continue to go higher and higher. Much of the post-election euphoria is over and tax reforms also seem to be headed for a failure. So investors need to be cautious with any new investments.

The following is an excerpt from an article by by Niels Clemen Jensen at Absolute Return partners:

The valuation argument first. Although it is very much a US-based argument, equity valuations are not outright cheap anywhere in the developed world (Exhibit 7), and we all know that, should US equities run into the proverbial wall, it will definitely have some negative impact on equity markets elsewhere.

Source: Two Sides of the Same Coin – September 2017, The Absolute Return Letter , Absolute Return Partners

Related ETF:

• SPDR S&P 500 ETF (SPY)

Disclosure: No positions

The dividend yield on the S&P 500 was 2.01% at the end of July. The yield has stayed around the 2% for many years now. This yield rate is low relative to other developed markets. In the US, investors and companies alike have a preference for share buybacks than dividends due to multitude of reasons. For instance, investors like to pay capital gains taxes when they sell stocks than paying taxes on dividends each year or quarter. Since capital gains are taxed more favorably than dividends this adds yet another incentive for investors to let companies keep profits as opposed to paying out dividends. Companies also prefer to hold on to profits instead of paying out to investors since they can plough back retained earnings to grow the company or deploy the capital to buy back own shares to goose up stock prices. Since stock options form a major portion of compensation especially to upper management, executing share buybacks all the time becomes even more important for companies. Another factor that favors buybacks over dividends is control. When cash goes out the door to investors’ pocket, the company loses control of that money.

The chart below shows that much higher dividend yields can be found in other developed markets outside of the US:

Click to enlarge

Note: The rates shown above are as of July this year

Source: Where in the world are the highest dividend yields?, Shares Magazine UK

In summary, US investors can earn higher yields by going abroad. With plenty of options available to invest in foreign markets cheaply there is no reason to simply stick with domestic stocks.