Tech stocks aren't trading like tech stocks

The sell-off in government bonds that extended for a fourth day on Friday could signal pain ahead for the stock markets, particularly for an unexpected sector: Technology stocks.

In fact, some analysts have noticed a strong correlation between bonds and the likes of Facebook (FB), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Alphabet (GOOGL). This is odd because tech companies are cyclical and their stocks are expected to do the exact opposite of that and then some.

Goldman Sachs analyst Robert Boroujerdi says the group, which he has termed “FAAMG,” is acting like a bond proxy because of its low volatility relative to even the most defensive groups of the S&P 500 like consumer staples and utilities.

“Steady sales growth, rising cash balances and limited market shocks have dampened realized volatility to the point that [FAAMG] now look more like consumer staples than tech stocks…FAAMG is cueing off 10-year bond yields…which is more analogous to a bond proxy/yield sector,” Boroujerdi wrote in a note earlier this month.

Historically, rising bond yields and falling bond prices are associated with stronger growth, which would be a positive for tech stocks. But that relationship has reversed. And this can be seen already with the technology sector (XLK) showing recent weakness, as shown in the chart below, that has correlated with a sell-off in bonds.

And this new correlation makes the recent bond sell-off especially notable, particularly as tech stocks have been a large part of powering the market higher this year.

Bonds have sold off in recent days, with yields rising, in response to comments from central bankers around the world, including Fed Chair Janet Yellen and European Central Bank (ECB) President Mario Draghi. All have talked about normalizing monetary policy after a seven-year period of near-zero interest rates.

“What goes on with interest rates and bond markets is the number one domino mark for whether the stock market rally will continue,” Deutsche Bank’s chief international correspondent Torsten Slok told Yahoo Finance.

Nicole Sinclair is markets correspondent at Yahoo Finance.

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