A recent article on a Goldman Sachs report released last week, which hints there may be a new tech bubble, states that:
“Goldman Sachs on Friday released a report on the top five outperforming mega-cap names in tech with some warnings on valuations and concerns that their volatility has become extraordinarily low. In fact, the stocks had become closely correlated to safe haven plays, like bonds and utilities.”
The realized volatility evolution, reported below, speaks for itself.
The mentioned report recognizes that today the situation is not the same as it was in 2000, as the big tech stock companies are cash rich. However, their performance in terms of profitability is far from impressive.
The point, nevertheless, is to try to figure out if there really is a bubble on the horizon or not. In our blog on Modern Volatility Measures we show how complexity – a modern form of volatility which takes into account also the structural aspects of stock price dynamics – can deliver information which is in contrast with the conventional plain vanilla measure of volatility based on just standard deviations. In many cases our complexity-based volatility – the so-called Intrinsic Volatility – confirms traditional volatility measures, in many cases it suggests something completely different.
A quick way to see what is going on is to go to www.assetdynex.com and to type a few tickers and check their complexity. For example typing the FAAMG tickers FB, MSFT, GOOG, AAPL, AMZN, delivers the result reported below.
It emerges that all the mega tech stocks all have high complexity, ranging from 42 to 56.
In contrast, stocks of large banks have considerably simpler, less complex dynamics.
Here, complexity values range from just over 10 to 27.
What is the bottom line? High complexity (i.e. highly complex price dynamics) points to situations of low predictability and which may deliver surprises. Quite the opposite may be said of low complexity scenarios. So, low volatility or not, the situation of the big stock companies appears to be unpredictable, at least in the short-term (NB. stock complexity computations are based on the last 60 trading days). This does, to a certain degree, confirm the possibility of a bubble but, at the same time, provides information contrary to what one concludes from realized volatility. They say volatility is low, we say it is high.