1937

Guest Post by Sven Henrich

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:

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 indeed. Too early to tell, but these next few weeks in markets will be telling.

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