Market Analysis

Tech Alert

The $NDX keeps moving from new highs to new highs driven by a narrow group of stocks. Nothing new about that as this trend has been ongoing for some time and headlines of new record prices for such stocks such as $FB, $AMZN, $GOOGL, $MSFT are now a daily occurrence. The untouchables. Jeff Bezos is worth $140B, no that was so last week, now he’s worth $150B.

How do you quantify risk in a market that prices in no risk?

While most people are focused on stocks prices one underlying issue that appears to be largely ignored by participants is the unprecedented market capitalization expansion we are witnessing in these few select stocks.

The numbers are simply staggering. Magic money out of thin air.

$FB, $GOOGL, $AMZN, $MSFT and $AAPL. These 5 stocks now worth nearly $4.1 trillion. That makes these 5 companies the 4th largest economy of the world if you use GDP as a reference. Not bad for less than a million people employed at these 5 companies.

Now check this out: Their combined market cap increase? $260,000,000,000. That’s $260B. In just the past ELEVEN trading DAYS!

No seriously:

Oh it gets better.

2018 year to date? EIGHT HUNDRED TWELVE BILLION DOLLARS market cap expansion in just 6.5 months. $812,000,000,000. That’s a company the size of a $MSFT or $GOOGL in its own right.

Now all these companies are growing revenues and earnings, but have they have expanded revenues, never mind earnings, in the past 6.5 months that justify an $812B increase in market cap? Buyers at these levels must think so.

Now let’s put this market expansion in context of charts.

$MSFT yearly:

$MSFT is now 29% above its yearly Bollinger band and 42% above its yearly 5EMA. Its touched its yearly 5 EMA every year since inception except 2000.

$AMZN:

$AMZN is now 49% above its yearly Bollinger band and 67% above its yearly 5EMA.

Doesn’t matter whether you show linear or log charts, the percentages are the same, but the linear charts highlight the historic perspective.

This is the kind of price expansion and technical disconnect that reminds of $CSCO in 2000:

$NDX is now on its 10th uninterrupted year up:

17% above its yearly Bollinger band and 31% above its yearly 5 EMA.

My premise remains: Eventual technical reconnects are coming with all of these and this defines the correction risk in this market. As the larger indices are now very much dependent on its largest market cap components continuing to ascent.

And for now this trend continues.

$NDX made another all time human history high yesterday also far disconnected from its quarterly 5 EMA again:

And it’s all about the magic 5 as the larger Nasdaq continues to show lower highs for new highs vs new lows as $NDX keeps marching on to new highs:

Yesterday 4 of the fab 5 had outside reversal days on the gap down and registered all time highs on negative divergences:

And of course $NDX also had negative divergence on multiple time frames from short to long:

On the 2 hour chart:

On the monthly chart:

I could go on, but you get my drift.

Massively extended charts with extreme market cap appreciations concentrated in a handful of stocks.

Are investors concerned?

It does not appear so as the $VIX has retreated back to below 12 yesterday and today, ironically retesting the broken trend line again:

I submit the combination of the factors above suggest that investors are greatly under appreciating risk in tech, hence the tech alert here. $812B in market cap appreciation came in 5 stocks in just 6.5 months. History suggests that vastly extended charts making new highs on negative divergences at points of extreme low volatility are subject to risk reversion and large market appreciations can disappear more quickly than investors are usually prepared for.

For now they keep on chugging along and perhaps will make further highs. But the warning signs are very pronounced.


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Authored by: Sven Henrich

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