We’ve talked about the year 2000 comparison (Party like it’s 1999). In 2020 markets went onto a similar structural tear just having rammed relentlessly higher. In 2000 markets famously topped in March following the Fed’s Y2K inspired liquidity injections in 1999 as markets had vastly disconnected from fundamental reality. Now that the truth is out we also know that markets are now vastly disconnected from fundamentals.
And the 2000 comparisons still hold water on a number of measures, price to sales, price to ebitda, market cap to GDP and of course relative weightings in favor of the few as the rally continues to narrow.
The top 2 stocks now have gone complete vertical especially as it relates to their weighting in the S&P:
This chart from Carter Worth on Fast Money last night and even he pointed out how in the lead up to the 2000 top there was some back and forth, but not here, just completely uninterrupted vertical.
One of the 2 stocks being Microsoft, a stock that now has nearly doubled since 2019 with a market cap expansion of over $700 billion for a total market cap of over $1.4 trillion. Historic.
And add the top 4 and their market caps you get this same vertical picture:
#MAGA ate the stock market… not that one… $MSFT, $AAPL, $GOOGL & $AMZN = nearly $5 trillion in market cap or ~17% of the $SPX. Different this time? pic.twitter.com/vXdEZo3Vs6
— Dan Nathan (@RiskReversal) February 7, 2020
Everything screams reversion and correction, but nothing. The market just keeps going up and they keep buying the big cap tech stocks. Risk free. Or so it seems.
And given the large weightings of these few stocks $NDX just keeps ramping up vertically as well, also far outside the monthly Bollinger band:
So yes, one can make year 2000 comparisons on some specific measures and market behavior.
In 2000 we had a top in March. One may consider that to be a sample size of N1, an outlier statistic, but it isn’t. Markets have seen this before.
1937:
Markets ran wild for several years following the 1929 crash and optimism was rampant. And look at the structure of the chart. A relentless rally in 1936, followed by another massive squeeze in early 1937 with a final spike into early March, and then all the 1936/1937 gains were given back in the same year as the recession unfolded.
That’s your revisit the lows of 2018 scenario.
No analog is perfect and I could be faulted for moving the scales, but generally speaking I can make the case for an at least similar structure here:
Are we topping here, or one more final burst into 3400/3500 on $SPX into March? April? I can’t say. The analog structure leaves room for the possibility that we may be topping here, but there’s no confirmation as of yet.
All I can say is that these top tech stocks are in technical la la land and present a clear and present danger to not only the stock market but also the economy. See these reverse hard and, because of their outsized weightings, take the indices with them we may see awe-inspiring systemic selling in markets that would bring about a recession.
It’s all theoretical right now, but that’s the larger risk I see in the structural make up of this market.
The market keeps getting narrower in leadership, it keeps getting ever more divergent and artificial liquidity is all that’s keeping it up. And, as markets have rallied relentlessly ignoring all risks, they face the prospect of meeting the fate of history of similar rallies in the past. Not only 2000, but also 1937.
And hence it’s perhaps ironic or telling that $SPX hit its upper trend line resistance today:
Wild if true.$SPX pic.twitter.com/NNy3qRyMzq
— Sven Henrich (@NorthmanTrader) February 11, 2020
Wild if true indeed. Too early to tell, but these next few weeks in markets will be telling.
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Categories: Market Analysis
Sven, when this Tulip bubble bursts it will be the “end”…it will devastate society. Our whole society is one ticking debt bomb….anyone who thinks that central banks are omnipotent doesn’t know history. It’s probably fitting that the biggest ego on this planet is obsessed with the stock market. He will go down with it…
Trump wants -ve rates and once this market sells 15-20% he will get his wish because Powell will have no choice down there so i dont expect much below 2900 S&P because they will then inflate this market to 3800+
Thank You for all your Hard Work you put in on these charts. Still I don’t understand how stupid people are they believe in the FED. I am lost for words that in the last month this is not down over 1000 points in the S&P 500. Fed made a real jerk out of this— keep pumping money in. What a joke this market is… Thanks everyone – God bless us all when this market goes down one day..
FAS, the triple long bank ETF, went from 1.83 in 2009 to 105.38 recently. I held it for a 3x gain, yet it went up 56x, so $10,000 in 2009 would be $560,000 today. When the government changed marke to market to mark to fantasy, I bought OTM bank calls five minutes after the announcement, and made an 8x gain in a few weeks, yet a few went up 100x (10,000%) after I sold. I also bought Tesla in the 20s and sold when it doubled, yet it has went up 50x as of last week. My farm land is up over 700% per acre in 15 years, and residential land sold with 49% gains in 2 years, all thanks to fed low interest rate policy! A few lucky gambles on high risk diversified (outside of stocks only) bets can pay out gigantic returns. You just need to have some cash to gamble and possibley lose (lost 6 figures once because I forgot to set a stop loss and went on vacation, so yeah, win a few, lose a few as stupid is expensive). Why the obsession on the market “index”??? Why not wait until everyone panics during the next crash, buy everything you understand of value, and sell once peak greed is reached again. This will be the third cycle for me, assuming another correction by 2020-2022 and I am middle aged. The fed liquidity cycle is predictable, you just have to be patient and buy when there is “blood in the streets”…
Point being, why is so much attention being paid to the SP500 going up another 4% to 3,500? Even if we get it to 4,000, that is just 14% from 3,500. I get confused why everyone is so caught up in such low returns when there are triple leverage ETFs and options markets where one can make 100% returns in less than 24 hours during earnings season when many stocks move 5-20% after earning release. Another 4% on a million dollar account is only $40,000. How does that change your life, really? Future 10% yearly SP500 returns from these historically elevated, and high risky levels seem illogical. I just don’t see the fun in making such small returns with so much risk versus other investments available that can double your money if you are only correct 10% of the time. Perhaps Sven could fill me in on why the population, including the President, is so obsessed on “Duh Dow”??? Seems to me the market OCD syndrome is keeping Americans from making more diversified wealth investments in more creative ways (specifically tangible income producing assets and collectibles). I find it all so fascinating…stock market mania is so confusing, and boring as very little further juice can be squeezed from this lemon.
You are only mentioning your winning trades using triple ETFs. When you lose you lose big time. Any long term trader uses such strategies only very selectively. Unless you work for JP Morgan and have up to the second valid info on everything, you will at some point realize why most traders have a much more risk averse attitude. Young traders tend to use such strategies.
You claim to be able to predict the future. Just reading this site should tell you that markets can’t be predicted, particularly when there is massive government intervention. How long does the Fed pump? Will it pump in even more, etc. Will the market eventually see the Feds actions as a negative rather than a positive?
One gap up or down overnight and you are toast in leveraged positions.
Having been an employee of MSFT for the last 17 years and in the sales organization, I have never seen the size of deals that the company is closing like they have in the last few years. Massive multi million dollar deals are commonplace and occasion billion dollar deal is heralded. The move to public cloud is a structural shift that companies are making switching their private cloud data center investments into public cloud. The market opportunity is huge and global in nature. This fundamental shift is still in the early stages and it’s driving revenues like I have never seen before. Asset prices are getting lofty and the comments made are good warnings to definitely be aware of potential irrational exuberance.
How did I miss this post first time around? Very prescient Sven, well done, though a bit hedged. But take care, you are close to giving away the time travelling thing.
I suppose, with hindsight, the biggest surprise is that it took so long to happen. I know it cost me a few bob to be a couple of weeks early. It’s amusingly lucrative to see stock indices consistently drop every time the incompetent buffoon gives a press conference. I’d only be slightly surprised if he got his willy out and ranted ‘it’s a perfectly big willy, now go up you stock bitches or…’
But they’ll go down again and he won’t (whatever).