Short Bets on Nasdaq 100 Soar as Investors Shun Tech Stocks

Investors are increasingly shunning tech stocks concerned by the high interest rate environment and premium valuation after an explosive run in 2023. Tech-heavy Nasdaq 100 has started seeing outflows depicted by the index pulling back from record highs. The index has been under pressure since July, signaling waning upward momentum.

Nasdaq Short Bets

According to strategists at Citigroup, investors are increasingly positioning for more losses on the tech-heavy Nasdaq 100. Fuelling the sentiments is the fact that the index is down by more than 5% from its all-time highs over the past two months. Likewise, the index attracts more bearish flows, leaving positioning heavier on short bets than longs.

The increased short bets contrast with the bullish momentum at the start of the year that saw the index attract strong buying pressure with every minor correction. According to strategist Chris Montagu of Citigroup, only some investors are comfortable maintaining a bullish view. The sentiments do not come as a surprise as most investors feel the index is overbought after a 37% plus rally since the start of the year.

The Nasdaq 100 has benefited from a strong buzz around artificial intelligence. Stocks exposed to revolutionary technology have been on an impressive run led by Nvidia, which has rallied by more than 200% year to become a trillion-dollar empire. The likes of Meta Platforms, Apple, Google, and Microsoft have also helped offer support to the index.

Nevertheless, there have been concerns that the impressive run in the Nasdaq 100 does not paint an accurate picture of the overall market. For starters, there have been concerns that the rally has been concentrated on a few cliques of tech stocks, which raise concerns about the sustainability of the upward momentum.

Client flows showing that tech stocks had the biggest redemptions from the week through September 15 could be an early warning sign of growing jitters in the sector. After an explosive start to the year, investors feel most tech plays are overstretched and need correction as valuations have skyrocketed significantly.

Fed Monetary Policy

In addition to valuation concerns, uncertainty over monetary policy also continues to send shockwaves in the investment community, forcing most investors to remain on the fence. The US Federal Reserve remaining hawkish about interest rate hikes is a tailwind that continues to fuel selling pressure among tech stocks.

The economy has remained resilient after increasing interest rates at the highest pace to above the 5% threshold, with inflation ticking lower. Nevertheless, the Fed is yet to achieve its recommended 2% inflation level, raising the prospects of another round of interest rate hikes. Focus shifts to Wednesday, where investors will want to see whether the Fed will hike interest rates and pencil in one more move before year-end.

The prospects of two more rate hikes before year-end should continue to send shockwaves as they come at a time when the economic situation has deteriorated significantly. Inflation concerns are starting to build up amid an uptick in fuel prices.

Likewise, borrowing costs have increased significantly, making it difficult for businesses and companies to access the cheap capital needed to support and accelerate economic activities. Tech stocks tend to perform poorly during aggressive interest rate hikes, which explain the Nasdaq 100 pullback.