In one of my video commentaries recorded during the February-March 2020 market crash, I showed how the ratio between Dow Jones and SP500 returned to levels not seen since 2015. The chart suggested that Dow Jones was relatively weak vs SP500 and therefore exhibited higher likelyhood of DJ outperforming the SP (or at least DJ would fall less than SP).
The ratio returned to slightly higher levels within three weeks but then headed back lower. The culprit was the SP500 technology sector that bounced higher, staged a massive rally and pushed SP higher compared to DJ.
The SP500 strength is confirmed by the DJ/SP ratio that touched the lower Bollinger Band set to 200 day moving average and three standard deviations.
However, the strength of the SP500 index pales in comparison to Nasdaq which has recently been on fire. Comparisons to 1998-2000 tech rally started to emerge in media. The amazing strength of the Nasdaq index pushed the Nasdaq/SP500 ratio back to levels not seen since 2000.
The pace of growh has been increasing for 20 years. Each cycle higher is faster and steeper than the previous. The growth seems to be a bit too fast. Parabollic moves like these often end with a fast, dramatic pull back.
A sign that Nasdaq is overextended is also confirmed by upper Bollinger Band that was touched recently. Even in this case I used 200 DMA and 3(!) standard deviations. This is a serious distance from a long term average and the simple concept of "return to mean" suggests extreme caution when purchasing the index at current valuations.
It is true that in the year 2000 there were too many companies that had no product, no revenues and no profit and yet their stocks were skyrocketing while now the growth comes from established and innovative players with useful products. Yet, 60%+ wihin 3 months is too fast even for strong companies with desirable products. Especially in today's environment, where consumer demand will likely be subdued in short and medium term due to strains in the labor market.
Nasdaq crash between 2000 and 2003 erased over 80% of the index' value. While I am certainly not predicting that Nasdaq will lose similar amount this time, I am confident that there are very few market participants that could even imagine Nasdaq back at the 2000 level.
The old saying that "Market always goes where it causes most pain to most participants" comes to mind.
Posts
