Same old, same old…
Capital continues to pour into the largest, ‘safest’ stocks. In doing so, it pushes the main stock indices higher and masks the fragile nature of the economy after being ravaged by COVID.
The Wall Street Journal reports:
‘Technology stocks pulled major U.S. indexes higher Thursday, as a handful of companies continued to power the newly minted bull market.
‘Shares of Apple, Facebook and Microsoft all rose more than 2%. The gains propelled the S&P 500 up 10.66 points, or 0.3%, to 3385.51 by the end of the session.
‘…investors stuck with a trade that has worked throughout the crisis, buying shares of highflying technology companies that have benefited from statewide lockdown measures that have accelerated the adoption of online shopping, digital communication and other services. The S&P 500’s tech and communications sectors have risen more than 60% and 40%, respectively, from the lows of March, helping to drive the broad index earlier this week toward its first record in about six months.’
As crazy as it sounds, the rising indices indicate a ‘defensive’ move by investors. That’s what they think, anyway. But there is no defence in an expensive stock. Not in the long run.
As I showed you here last week, on a price-to-sales metric, the S&P 500 is now 20% more expensive than it was during the 2000 peak. Price-to-sales is the best metric to gauge tech stocks because the market judges them on market and market share growth, rather than bottom line earnings. In the land of tech stocks, earnings come later. Always later.
Meanwhile, under the hood, all is not well.
Recently, the NASDAQ has advanced while displaying negative breadth. For example, even though the index rose by more than 1% overnight, the advance-decline ratio was just 0.65%. That is, for every stock that increased, 1.5 stocks fell.
You can see this lack of breadth in the chart below. The blue line shows the performance of the NASDAQ Index, while the red line is the advance-decline line. Positive breadth would see the advance-decline line making new highs with the index.
That’s not happening here.
There are two points to note on this chart.
Firstly, the recovery to new all-time highs in the NASDAQ has not been accompanied with a rebound in the advance-decline line to anywhere near the highs reached in early 2020.
And more recently, the advance-decline line turned lower while the index hit new all-time highs.
That simply tells you capital is concentrating on the biggest names and leaving the others behind.
It’s the sickest market recovery and all-time high I’ve seen.
The NASDAQ is a bubble waiting to burst
Which is why I believe the NASDAQ is a bubble waiting to burst.
It’s rising simply because ‘everyone knows that everyone knows’ the big tech stocks are the ‘safest’ game in town.
But history has proved time and time again that expensive stocks — no matter how solid — are far from safe investments.
And even though the Aussie market isn’t priced as high as the NASDAQ, it has its own breadth of issues too. The chart below shows the ASX 200, with the advance-decline ratio deteriorating.
While the market has moved sideways since June, the advance-decline line has fallen.
None of this tells you that the market is going to tank tomorrow, or next week, or next month. It’s just one piece of the puzzle.
But as for the epicentre of this stock market bubble — the NASDAQ — it’s an important piece. The concentration of capital is stark. This is not how healthy bull markets behave.
When it comes to the Aussie market though, I’m not as concerned. For the most part, valuations are reasonable, at least in a global context. That reflects our market’s banking and industrial base. Even the big resource companies look cheap. That’s if you believe in the China perpetual growth story (I don’t).
But we do have our outliers.
Just look at Afterpay Ltd [ASX:APT].
The stock has a market value of $22.5 billion.
Sales for FY20 are expected to be $500 million, producing an expected loss of $40 million.
It’s a valuation full of belief and wild imagination in what the future might bring.
How long it persists is impossible to tell. ‘Everyone knows that everyone knows’ that Afterpay is going higher. Until it doesn’t.
Every bubble is different. But at their core, they’re all the same. Irrational valuations impervious to rational arguments. Bubbles are all about belief in the impossible.
Editor, The Rum Rebellion