The stock market just did something eerily similar to the dotcom bubble top in 2000
A man walks a dog in the shade away from the midday sun in front of the New York Stock Exchange (NYSE) building in Manhattan during warm weather in New York City, New York, USA, August 11, 2020.
Mike Segar | Reuters
The S&P 500 closed at a record high on the last trading day of May, but only a handful of stocks (mostly focused on the AI space) reached all-time highs.
This strange event is reminiscent of what happened 26 years ago at the height of the dotcom bubble.
Only 20 of the index members broke records on Friday. Only seven of these 20 were not directly related to AI.
Bank of America’s Michael Hartnett noted in a note late last week that there were only 20 stocks that reached new highs at the top of the internet bubble in March 2000.
While the widely followed strategist says the “speculative price action” is probably not over yet, this is the latest sign that the event is coming. Hartnett believes central banks and rising interest rates will eventually determine the outcome and provide customers with a “post-bubble” road map.
May’s stock boom was largely driven by semiconductors, especially memory chip makers. Micron Technology, Advanced Micro DevicesSK Hynix and Samsung are worth a trillion dollars or close to it. AMD was up 50% for the month, Micron was up 85%, Samsung was up 43% and SK Hynix was up 81%.
The tech-heavy Nasdaq Composite rose 25% in April and May, its best two-month period in more than two decades.
narrow bull
A growing number of strategists and investors worry that if this bull market doesn’t begin to expand, it will eventually be doomed.
Forward decline lines, showing the number of stocks rising compared to the number of stocks falling, showed a similar trend; It started rising at the end of March and then fell to the bearish mark since mid-April.
“Internal data has lagged since the initial surge in April,” Ari Wald wrote in his May 23 technical analysis for Oppenheimer.
Only 55% of S&P 500 components were trading above the 200-day moving average as of May 20, according to BCA Research.
S&P 500, 1 year
“Although the United States and [emerging market] Stock indexes have reached new highs, their advance remains extremely narrow. “Weak breadth is often a sign of stock market vulnerability,” BCA strategists led by Arthur Budaghyan said in a May 20 report.
Hartnett advises his clients to get into a defensive position soon.
“The post-bubble investor road map since 1929 has consisted of a combination of long bonds and longs of defensive and/or sectors that significantly underperformed in the final months of the bubble,” he wrote.
