Hedge funds are turning their backs on tech stocks

new york stock exchange trader computer charts

My how the tide has turned for tech stocks.

Until recently, the industry was viewed as the indispensable driver of the equity market. Companies like the so-called FANG group — which includes Facebook, Amazon, Netflix and Google — received loads of credit for pushing stock indexes to new records.

Now the shoe is on the other foot, with hedge funds and other large speculators the most bearish in 16 months on the tech sector, Commodity Futures Trading Commission data show.

What's more, investors have pulled roughly $900 million from exchange-traded funds tracking tech stocks in the past week alone, the biggest outflow for any industry, according to data compiled by Bloomberg.

Hedge Funds

And in a shocking twist for the Wall Street doomsayers who warned of a painful reckoning in the event of tech weakness, US indexes have continued to hit new all-time highs, even amid the shift in sentiment.

This surprising development is best explained by the ongoing rotation occurring in the stock market. As tech has faltered, energy and financial stocks have stepped up to fill the void. They've been boosted by a surged in crude oil prices and the prospect of higher interest rates, respectively, and it's proven to keep the 8 1/2-year bull market chugging along.

The truth is in the returns. Tech was up more than 25% in the first eight months of of the year, then fell in September. Meanwhile, the energy sector surged 9.8% in September after a 17% year-to-date decline through August.

With the benefit of hindsight, it's clear that this rotation has played out multiple times this year, with money pulled from tech simply being reallocated elsewhere in the stock market.

And now that the dynamic is attracting a little more attention, equity enthusiasts have yet another bullish argument to add to their tool belt.

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