The following commentary is the opening salvo to my latest bear newsletter. In the last issue I updated my work on $NVDA and $TSLA plus two homebuilder stocks and I reviewed $CVNA’s earnings. You learn more about it here: Short Seller’s Journal
The irrational exuberance that has engulfed the stock market is officially more idiotic than the tech bubble asset that popped in March 2000. The forward P/E ratio for US technology stocks (S&P 500 Information Technology Sector index) is just below 30, its highest level since 2002. But that comparison needs to be “unpacked.” Back then, the P/E ratio for tech was higher than it is now because most of the tech stocks in the S&P 500 tech index were still in the early years of operation and growth. Relative to now, they generated very little in earnings.
On Thursday, the Nasdaq 100 (100 largest market cap stock on the Nasdaq) jumped 3% to a new all-time high. The last time the NDX hit an ATH after spiking up 3% was…drum roll… March 2, 2020 (@SamanthaLaDuc). Ten days later, on March 12th, the Nasdaq hit its then ATH. The following day it plunged 4.5% and the tech bubble officially popped. I responded to Samantha LaDuc’s tweet with this:
“I was trading dot.coms and tech stocks from the short side in the late 90’s through the crash. The current market doesn’t even rhyme – the current market bubble is a much bigger and unstable than the tech bubble market. The current stock market is more like Frankenstein off the chain.”
The breadth of the current stock market rally is a big red flag. Again, on Thursday with the Nasdaq up over 3%, just 55% of the stocks in the Nasdaq Composite were higher than the previous day. According to SentimenTrader.com, the last time this occurred, and it occurred five times, was between 1999 and 2001. In addition, per @unusualwhales, the market cap concentration of the top 10% of stocks hit its highest level since 1929, which is even higher than it was in 2000. This market is headed for a huge accident in my opinion. The only unknown is timing.
In yet another sign of a top in the stock market, the formerly most esteemed U.S. university which hired a now former president who is anti-semitic and a plagiarist (Harvard University), has 98% of the public stock investment portion of its endowment portfolio in tech stocks (Harvard tech allocation). Of this, 70% is in Google and Meta.
The price discovery function of the stock market has been completely disconnected. That canary is dead and, for now, hidden from view. In its place is computer algorithmic momentum-chasing and gamma-squeezes caused by the massive amount of hedge fund and retail money that piles into weekly call options, thereby forcing market makers who short the calls to hedge by going long some percentage of the underlying shares. The “investing” decision has absolutely nothing to do with fundamentals-based investing. As a result, the stock market is very unstable and dangerous.