Sometimes we like to call a short here at The Armchair Trader. Sometimes it’s a stock, but sometimes it is an index. We feel a short on the NASDAQ Composite is warranted this month. In conversations over the last couple of weeks more than one commentator has said something along the lines of “this feels like the tech bubble.”
They are referring of course to the tech bubble of circa 2000, when the first generation of tech stocks were driven up to astronomical and highly unrealistic valuations and then saw the wind taken out of their sails, leading to a massive decline in stock prices going into 2001. Thousands of so-called dot.coms went to the wall.
The time it’s different…isn’t it?
This time it is different of course. Instead of cheap private equity money, it is the central banks themselves and especially the Federal Reserve that have been pumping money into a system that has led to the boosting of stock prices, but especially tech stocks, since the start of the pandemic. One fund manager told me on a conference call recently, “How can Tesla [$573bn] be worth eight times more than General Motors [$79bn]? Tesla is not worth eight times more than General Motors!”
And the truth is, Tesla isn’t. The stock is being driven up by hundreds of thousands of smaller investors who are buying into the brand and the ideology of Tesla, just as they drove up the valuation of Apple stock several years ago. But we’re not here to debate the merits of Tesla versus General Motors or even Apple, we’re here to debate the future of the NASDAQ.
Has the NASDAQ Composite peaked?
Timing a short is everything – has the NASDAQ capped out? If there was a peak, it looks as if it was reached over the weekend of 13/14 February. Shortly afterwards the romance seems to have ended. The index dropped over 1600 points peak to trough from that Tuesday. In recent days solid US jobs reports have helped to boost stock prices, but while this has produced a small rally, it has not arrested the selling, if the volume patterns on Thursday and Friday are anything to go by.
And then there are the indicators coming out of the bond market.
“With higher yields, and the expectation that they will rise even further, it might be worthwhile to take some profits off those risky stocks,” said Mati Greenspan, CEO at Quantum Economics. “You may be slightly annoyed that the Fed has outlined a problem without offering a solution, but I’m sure you’ll get over it. For the average Joe casual investor, now is not the time to panic. We knew this would happen. We understood that inflation would come even though the Fed wasn’t sure.”
Investors do indeed seem to be starting to take some risk capital off the table. It does not seem to have the makings of a full-fledged rout, however. As we saw on Friday, some investors were prepared to buy back in at lower prices. But that index does look like it is sliding. There are now some real fears among some investors that the stimulus bill now moving through Congress could bring with it the threat of major inflation in the US economy. US benchmark 10 year Treasury yields hit 1.62% on Friday, a level not seen since the start of the pandemic. Watch that bond market folks.