… But Valuations Remain Compelling

Top 10 Reasons To Dump Growth Stocks

We have compiled this week our “hit list”, or Top 10 signs that technology stock euphoria is now present. Here we go…

Number 10. The Dow Jones Industrial Average shake-up. Following Apple’s (NASDAQ:AAPL) stock split, the folks at S&P Dow Jones felt the need to increase the weight of technology in the price-weighted Dow (Apple’s split reducing its weight in the index). So, they decided to add Salesforce.com (NYSE:CRM), a likely bubble stock. The low-life energy stock Exxon Mobil (NYSE:XOM) was booted from the Dow. But there is historical precedent for this Dow rebalancing. In 1999, near the peak of the tech bubble, they decided to remove an energy company (Chevron (NYSE:CVX)) and add a tech company (Microsoft (NASDAQ:MSFT)). Hmm… past is precedent.

Number 9. Federal Reserve members are oblivious to the asset bubble they are blowing. This week, St. Louis Fed President James Bullard side-steps the question of inflated asset prices saying, “I don’t really think this is about monetary policy… I think our monetary policy is just right for this situation. We have a low policy rate, and we’re going to stay low for a long time.” No, James, the asset price bubble is not about monetary policy. Or is it?

Then we have super-sleuth Cleveland Fed President Loretta Mester saying this week that “I don’t feel right now that we are engendering an asset bubble. I do feel we are supporting the economy and we’re doing what we can to make sure financial markets continue to function” (in response to the question if equities are too highly priced).

Regular readers and students of the market will know that the historically the Federal Reserve has been dead wrong at most major market turning points.

Number 8. S&P 500 market cap-to-GDP ratio. Oh no, never mind this chart. Valuations remain compelling because of… interest rates. Yes that’s it, low interest rates.

Number 7. Sentiment. We have been hearing people cite individual investor surveys that suggest we are not yet at an extreme in sentiment. We beg to differ. Two exhibits. First, the Citi Research Panic/Euphoria Gauge. Since 1987, a long time ago, we only had one period in which euphoria was greater. You guessed it.

Exhibit 2, the WMA Market Sentiment Indicator. The economy is not as robust (by far) as it was last January. But investors are just as giddy.

These sentiment readings are reinforced by empirical evidence. Talking heads are still parading on CNBC and Bloomberg TV telling the public that “technology stocks still offer good value for long-term investors”. What? Just how long are they talking? #greatcontrarianindicator

Number 6. Jim Cramer keeps telling his audience over the past weeks to “own Apple, don’t trade it”. Falling in love with bubble stocks. Oh, by the way, Cramer also said a few months ago NOT to buy Apple when it was at $310. Sounds like our loquacious cheerleader is feeling euphoric.

Number 5. While we hear so many market participants cite reasons why “traditional valuation metrics” should not be a concern today (low interest rates, central bank liquidity, etc.), seeing the P/Es on the following market-leading stocks (over 50% of the Nasdaq index) DOES make us worry.

Number 4. Tesla (NASDAQ:TSLA). The electric car maker has surpassed Walmart (NYSE:WMT) as the 9th largest stock in the U.S. Walmart’s annual revenue is $523 billion. Tesla’s annual revenue is $25 billion.

Number 3. While there are many laggard stocks in the S&P 500 far from highs, the reality is that the S&P 500 is dominated by a handful of mega-cap tech stocks. And these stocks have pushed the S&P 500 price to its greatest spread with its 200-day moving average of all time. The word begins with an “O”, ends with a “T”, and in the middle is “VER-BOUGH”.

Number 2. The Put/Call Ratio. The S&P 500 put/call ratio is near historical lows. Why waste option premium buying a put when stock prices only rise?

Meanwhile, the mega cap stocks are seeing lots of option activity on the call side. Keep up those leveraged bets to the upside!

Number 1. Shorts are currently at more than a 15-year low. Enough said.


If it walks like a duck, quacks like a duck, and looks like a duck… We find human psychology amazing. Bubbles have formed continuously in asset prices throughout history. Yet each time humans are able to find the necessary excuses to convince one another that this time, the price rises are justified and it’s not a bubble. Sort of like convincing poor Charlie Brown that Lucy will finally let him kick the football. One might wonder if tech stock buyers today “must be the most stupid people alive” (in Charlie Brown’s words, not ours). While our Top 10 list may or may not convince readers of an equity bubble in formation, how can investors dismiss these infamous parabolic run-ups in technology stock price charts? Get ready, speculators, because more intelligent investors are going to yank that football away!

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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