Over the last two weeks spanning the middle of 2017, the S&P 500 has mostly gone sideways even as its components have become more schizophrenic. The analysts at Deutsch Bank have an intriguing hypothesis about why that is (via ZeroHedge, we’ve added the highlighted links to the referenced figures):

Looking at the transition from “low-volatility, high-dividend shares to high-volatility, low-dividend shares”, the German bank says that in recent months, shares with low volatility and high dividends are seen as alternatives to bond investment. Amid falling interest rates, risk-taking money had not been satisfied with investing only in defensive stocks as an alternative to bonds, but had also been investing in technology stocks.

Interest rates (investment yields) have trended back downward since 2H of last December, prompting greater risk-taking (see chart above), and “amid the slowdown in corporate earnings growth, the market focused on technology stocks like FAANG with robust fundamentals.”

As a result, the implied volatility of technology stocks in January-May had dropped to the level of defensive stocks in early 2016. Investors who had bought defensive stocks as an alternative to bonds when yields were in decline at the start of last year could buy technology shares in terms of risk volume.

This is why tech shares offered the best return in the Jan-May period, something which as Bank of America showed yesterday has led to the best outperformance for the mutual fund industry since 2009. As shown in Figure 32, the volatility of excess returns in US technology stocks was around one-third that of defensive stocks. Technology shares had lower dividend yields than defensive stocks, but the difference was tiny, comparing with the scale of excess returns in line with price movements (Figure 32). We see that technology shares had the lowest risk and highest returns this year through May. The financial sector largely underperformed due to the low interest rate.

Inversely – and obviously – rising long-term rates have an adverse effect on excess liquidity, damaging the P/Es of US technology shares, which were in the front-line of risk-taking (Figure 31).