What Happens When the Passive Investor Gets Active?

After hitting all-time highs (again) in recent days, US stocks took a breather overnight.

The Dow fell 0.75%, the S&P 500 declined 0.51%, while the gravity-defying NASDAQ managed to remain flat. The small-cap Russell 2000 fell nearly 2%!

There were notable falls in some commodity prices too.

Copper fell around 2.3%…

WTI oil sank 3%…

Gold and silver managed modest gains though, and bond yields rallied.

All this can be put down to a bit of profit taking. Just another day in the markets. Nothing to see here.

But today, I want to zoom out a bit. I want to take a look at the forest, not the trees.

Let’s have a look at a few charts.

First, Apple. This is a long-term weekly chart. It shows a company in a healthy long-term upward trend…until the madness of COVID hit:


Source: Optuma

[Click to open in a new window]

The share price went vertical. What’s interesting is what happened AFTER that initial vertical melt-up. As you can see, the shares continued higher, but in a much more volatile pattern. At the same time, the MOMEMTUM of the upward move began to decline (see the MACD indicator at the bottom of the chart).

MACD is a type of momentum indicator. The divergence between price and momentum is a concern. But more than that is the absolute move in the MACD to levels well beyond anything seen in the history of Apple’s trading.

It’s the same picture with Google (or Alphabet, as the parent company is called).

You can see the post-COVID surge in price and momentum. Again, it’s well beyond anything seen in Google’s history:


Source: Optuma

[Click to open in a new window]

Then there’s the other tech titan — Microsoft. This is interesting because it has a long trading history and was part of the tech bubble in 2000.

After that bubble burst, it took Microsoft 16 years to get back to its bubble highs:


Source: Optuma

[Click to open in a new window]

From there though, you’ve seen another bubble develop. This one is a fair bit bigger…

Again, note the momentum is well above the dotcom highs. In fact, it’s four times as high!

What’s behind this surge?

Sure, tech companies have profited enormously from the COVID lockdowns. But prices are now trading on very high multiples of what are potentially peak-cycle earnings for these companies.

In a normal world (and, no doubt, with the benefit of hindsight), this is madness.

I think you can simply put it down to the surge of dumb money into passive index funds. Got a spare stimmy cheque? Whack it in an S&P 500 ETF.

The market’s going up? Want to be a part of it but don’t know where to invest? Whack it in an S&P 500 ETF.

Want to jump on the tech stock trend? Buy a NASDAQ 100 ETF!

Can you imagine the trillions of dollars flowing into these funds that don’t give a hoot about fundamentals and valuations?

And can you imagine the damage these same trillions will cause when they realise making money isn’t as simple as jumping on the end of a massive trend and look to get out?

My mate Vern Gowdie reckons this is all part of the ‘Everything Bubble’. In fact, he sees tech stocks as one of four ‘Code Red’ investments. You can read about the other three here in his excellent report.

That tech stocks are in a bubble is not in doubt. Where I differ from Vern is the idea that ‘everything’ is in a bubble.

Take precious metals, for example. Gold and silver peaked in 2011. They are both currently trading below those peaks. Silver is well below it, while gold only marginally so.

Oil is still well below its peak of 2008, as is uranium from its 2007 peak.

In my view, there will always be opportunities to invest. You just need to focus where everyone else isn’t.

Right now, tech and large-cap stocks appear to be capturing just about every marginal dollar that goes into the market. Certainly every passive dollar…

So keep that in mind when looking to allocate your capital. If you get the timing wrong, it can take many, many years to recoup your losses.

Better still, read Vern’s report before you do anything else. It makes for sobering but important reading in these crazy times…


Greg Canavan Signature

Greg Canavan,
Editor, The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

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