A tale of two cities

A tale of two cities. Overpriced & overbought vs. Underpriced & underbought. Silicone valley vs. Shanghai. One houses the Magnificent Seven. The other house behemoth tech names like Tencent and Alibaba.  One city has seen magnificent returns. The other, behemoth losses. Is this trend likely to continue?

Simple valuations

Valuations of a market are not everything. Investors pay for growth. But to keep it simple, a comparison makes sense to get a feel for the two cities we are discussing today.

The S&P 500 has a current PE of just under 27. It’s forward PE is 15.5.  The Magnificent seven has a forward PE of 35 (Factset data). Yikes!

Comparatively: The Shanghai exchange forward PE is under 11 (Factset). The Hang Seng is trading at a forward PE of 8. The tech behemoths like Tencent and Alibaba are trading at forward PE’s of 8-13.

Yikes! But–for the opposite reason to the mag-seven stocks!

Much of the trend and valuation discrepancy occurred between the final quarter of 2023 to current. See the chart below

The Tech bubble vs. recent AI stock movement

“The internet was real (during the 1999-2001 tech bubble) but so was the oversupply of fiber optic cables relative to what the actual demand for data traffic ultimately proved to be. One thing we know from the history of all technology revolutions, assuming we can give generative A.I. that label, is that all exponential growth eventually saturates, though we also know that in some cases, it can last for decades.

But the speculative nature of what is happening in Big Tech has historical roots and the tendency typically is for investors to overestimate how big the market for new technologies become compared to what is getting discounted by Wall Street.” David Rosenberg, Rosenberg Research

The MAGS ETF noted above is the only pure MAG-7 ETF I am aware of. Its got a short history (listed last April) so its not got enough data to provide relevant overbought/oversold signals. So, I’m posting the XLK Tech sector ETF below. While XLK is not a “pure” MAG-7 ETF (44% in AAPL & MSFT), its still a benchmark for the technology sector in the USA. The chart below illustrates that the sector is approaching a mid-termed overbought status. The ETF is about 13% ahead of its 40 week SMA. I get worried at 15% + for that indicator (pls. refer to my Online Trading Course). Moneyflow Index and RSI (bottom panes) are nearing, but not quite at, overbought levels. There may be a bit more to go on the sector before a correction.

Meanwhile, the KWEB Chinese Internet/tech ETF is meandering sideways. No technical signs of a revival in the Chinese tech sector on the weekly chart. This, despite the past few days of upside for that market – less visible on the weekly chart.

Conclusion

Rather than repeat myself, I’d encourage you to read this blog – where I covered the potential behind investing in the Chinese markets, and their internet/tech stocks. In that blog, I looked at recent institutional buying behavior, investor sentiment signals, and a market incentivization plans by the Chinese government.

Traders might want to participate in the neartermed moves, but investors who are not willing to exercise quick exits upon upside or downside trading targets should remain cautious.  Note that ValueTrend has a position in a broad Chinese ETF and a Chinese tech stock.

Investors should also pay close attention to the potential of a meaningful change in the technical status of the Chinese tech sector. Meanwhile, its obvious that we should pay equal attention to the probability of an overbought pullback on the US tech sector – particularly the MAG-7’s.

One Comment

  • In terms of literature and big names in finance, it appears Benjamin Graham is still right while John Bogle’s thinking is wrong in 2024. The markets are concentrated in the magnificent 6, attracting speculative investments in technology, pounding the table rabidly on A.I. , making the market index rise. It is not the case of there being a concept of all stocks rising when in a general “rising tide” market index upswing in the markets, taking good, mediocre and bad stocks increasingly upwards with it.

    Retail inestors cannot be blindly buying anything and everything off the shelf without submitting the stock to the BS test…PE, book value etc.

    Reply

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