Energy tracks and technological failures
Let’s start with the bad news. The bad news is that the market is 91% overbought. The daily and weekly market trends continue to be bearish. In other words, regarding technology and other sectors, we are still in a series of lower highs and lower lows until proven otherwise. Volatility remains high, which is a main characteristic of the bear market.
The slight piece of good news is that the market has been flat since mid-June, while big tech stocks have hit new lows. This is a positive given the high weighting of technology in most major stock indices. As the S&P 500 was once biased more than 40% towards tech-related stocks and tech-heavy indices are hitting new lows, value-oriented stocks have taken over. Although the market has been relatively stable since June, it took a lot of volatility to get there.
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It’s no secret that big tech stocks had a tough time in 2022. It was also no secret that there was a high percentage chance that tech stocks would end up leading to weakness in the market. Over the past few years, big names like Facebook, Amazon, Tesla, Netflix, Google, and Nvidia (to name a few) have driven the markets higher. Coming out of March 2020, these titles have seen a substantial, parabolic rise. All parabolic curves end the same way.
Here is a long quote from a previous market update, titled “The Nasdaq has a weight problem.”
The S&P 500 is heavily weighted towards tech-related stocks, and 50% of the Nasdaq 100 is made up of just 8 stocks. Therefore, the S&P 500 was only led by a few big tech-related names… This is not the first time this has happened. The percentage of technology-related stocks was almost the same in 1999 as it is today. As we discussed at the beginning of this update, technology stocks rose more than 1,000% from 1993 to 1999. Since the S&P 500 is a dynamic index, top performers will become a more important component. Tech-related stocks went from 15% of the index in 1993 (when you add communications stocks) to almost 40% in 1999. The strong rise seen in technology stocks was eventually followed by a strong drop that dragged the rest of the market down. walked down with her.
We’ve all heard the saying “history repeats itself”. Will history repeat itself in the markets?… Whether it’s tulip bulbs, beanie babies, Pokemon cards, bitcoins or stocks, markets sometimes tend to get overly emotional and react in a volatile way. While tech stocks have been the best sector in the markets for the past 10-12 years, will the next 10 years be the same? When a bear market comes, and eventually it will, it will have to be led by technology stocks because of their heavy weight in the markets.
We don’t know when a technology bear market will occur, only that it will occur at some point, or at many points in our lives. All parabolic advances ultimately lead to the same result: a steep drop.
—Source: “The Nasdaq has a weight problem”, Canterbury Investment Management, December 20e2021
Since Facebook changed its name to “Meta”, in October 2021, the stock has been anything but “meta” (Most-Effective-Tactic-Available). Since its peak in September 2021, the stock is down -75%. In 2021, Facebook was the 5e the largest stock in the S&P 500. A year later, it is now outside the top 25. Stocks like Tesla and Amazon, while still important components in the market, are breaking key support levels. Netflix is down -60% in the past year and Google should consider removing search engine results for its own stock price, down -40%.
For better or worse, these companies have changed our lives beyond recognition from the way people relaxed 30 years ago. But, to quote our previous update:
“Markets are governed by supply and demand. Supply and demand are determined by human beliefs and their degree of emotion about their future predictions. Throughout history, we have seen significant technological advancements and new business models that would have been unrecognizable in previous generations. That being said, human behavior has remained relatively the same.
All stocks will eventually experience a bear market, just as we are currently experiencing.
To quote the great Yogi Berra, “It’s like deja vu all over again.” As our good friend David Vomund wrote this week, “it looks like 2000-02 again. The best investment advice right now is to own your parent’s stock.
Value stocks dominate the markets. While the S&P 500 has been stable since mid-June, the Dow Jones Industrial Average is up slightly. Energy stocks continue to outperform. Interestingly, the markets will continue to confuse the masses. Tech stocks have been the leaders for more than 10 years. During this time the energy has been at or near bottom. This year, the roles have been reversed. The energy is up and the technology is almost down. If the trend continues, perhaps energy stocks could become the new “FAANG”, although we would need a new acronym. One thing we know for sure is that this week’s market could use new energy
It’s not all bleak, but success in this type of environment isn’t about picking the right title that will rise. It’s about portfolio management and holding the right combination titles that evolve differently from each other. More importantly, it’s about adapting this portfolio to move in concert with ever-changing market environments, whether bullish or bearish.
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