How Crowded are Tech Stocks?

A Systematic Approach to Measuring Peak Investor Interest

August 2018. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Equity crowding models can be applied to factors and sectors
  • Crowding leads to more frequent drawdowns
  • Tech sector was crowded over the last 12 months

DOT-COM REDUX

Many investors are wary of technology stocks despite their strong performance over the last several years. The implosion of the dot-com bubble back in the early 2000s casts a long shadow.

Such fears may be overblown. The gains of the technology-heavy Nasdaq and the S&P 500 in recent years are more moderate than the rapid jumps seen at the turn of the millennium. That gives some reassurance that the situations are not quite analogous.

Nasdaq S&P 500 Performance

Source: FactorResearch

But if history doesn’t repeat, it still may rhyme. So just how crowded are technology stocks today, especially the powerful FAANG quintet of Facebook, Amazon, Apple, Netflix, and Google? After all, among its other lessons, the dot-com bubble illustrates the risks of crowded stocks. A sudden change in market sentiment can lead many investors to try and unload the same equities simultaneously. With few natural buyers left in the market, the losses can become a