Tech Stocks – What Happens When the Music Stops?

As NVDA and the select few strong tech stocks continue to knock it outta the park, one cannot help but wonder: What happens when the music stops?

Today’s blog addresses that question.

Bob Farrell

Technical Analysis icon Bob Farrell listed several investing rules to abide by. Frances Horodelski recently reminded me of two of those rules that may apply to the current markets. By the way, Frances, who was always my favorite BNN host, has an always insightful blog here.

“Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.”

“Excesses in one direction will lead to an opposite excess in the other direction”

Nvidia Trust

A PM in New York quoted in BearTraps:

The problem I have with Nvidia is the management team’s history of spectacular pumping (they blew so many people up on the crypto- meta chip bullshxt) and the company’s history of large drawdowns in a crazy cyclical biz – and sector.”

Supreme Court Agrees To Hear Nvidia Appeal of Crypto Sales Lawsuit (investopedia.com)

What Happened After the 2001 Tech Stocks Bubble Implosion?

One of the benefits of being in this business for 34 years is that I have been sitting in the same seat through many corrections and crashes. You learn a few things over that many years. You look for patterns. You look at crowd behavior.

Today, let’s look at the historic pattern for the NASDAQ in 2001. That year, by the way, is the last time we saw such concentrated strength in so few tech stocks. I strongly encourage you to check my blogs outlining breadth research: Yet Another Warning Sign for the Nasdaq 100 and Have NA Markets Entered a Sideways Period?. These blogs will help you understand how the closely the current market resembles the 2001 market.

Here’s the NASDAQ chart, with some annotations surrounding 2001. Assuming you checked out the two blogs linked above, you recognize the low breadth market leading into 2001 resulted not only in a 50% correction.  Then, a prolonged sideways consolidation period lasting into 2013.

Nasdaq Composite IDX (June 20, 2024 9:32am) | Tech Stocks

OK, now let’s look at three of the leaders of that era. Realize that there were other stocks that climbed hard and fell in 2001. The difference being, they didn’t survive. Think Nortel (Canada), Juniper Networks, and a myriad of smaller names like Global Crossings. Only you old dogs in the game will recognize some of those names!

MSFT, CSCO and INTC did survive that era. Just as they will likely survive another crash. I think NVDA will be around as well. The question is – will the historic pattern for low breadth bubbles and crashes happen again? Will these stocks go sideways after (IMO) an inevitable correction? Was Bob Farrell right?

MSFT Price 1990-2015 | Tech Stocks

CSCO Price 1990-2015 | Tech Stocks

INTC Price 1990-2015 | Tech Stocks

Conclusion – Tech Stocks

“At 23x 2024 expected earnings, the market-cap weighted S&P 500 is froth with excess and in our judgment uninvestable. You can have extremes of over or undervaluation in the short and even intermediate terms. But in the long run, Mr. Market gets it right. Chris Bloomstran, The Value Investor

I agree with Mr. Bloomstran. In the long run, Mr. Market will get it right – especially the tech stocks (and NASDAQ).

However… Good technical analysis isn’t about picking exact bottoms and tops. For now, ValueTrend continues to hold the majority of our capital in stocks. However, we are trimming positions as targets or stops are hit, without reinvesting. We typically hold a bit of cash every summer, so this action doesn’t conflict with our technical observations. Plus, we go even more cash when the Bear-o-meter drops below 3. We just raised another 2% by selling a position that moved up quickly last week. We are now in the low 20’s in cash positions in our equity models. See this video to hear my thought process on making that trade.

As/if/when necessary (aka markets keep rising), we will raise our support/sell point levels.  Yes, the market, particularly the handful of bubble tech stocks driving that market, “feels” like it’s in the final stage.  But we don’t predict. We do prepare. We will let the stock market tell us when its over. Currently, that means the SPX cracks the last peak (5264, to be exact) for several days before aggressively selling.

Back next week. Note that I have moved my BNN MarketCall date from this coming Monday June 24th to Thursday July 4th (Independence Day!). I’ll post a reminder of that date soon. 

7 Comments

  • What was the action that changed your original decision on CWB. At the end of the video it was hold it for now. I too own this stock and have made the decision that the next twenty five percent is very likely and a dividend while I wait. Was it time to fruition or did some uncertainty come to light?

    Reply
  • Hi Keith, NVDA has had a very impressive run since the start of the year whereby growth oriented investors have realized some nice gains and value type investors like myself have missed out, given it’s stretched fundamental valuations along the way and techicals as well (% above its 200 DMA, etc.). Given that it’s not some fringe stock that came out of nowhere, is there anything in your process that you would change in future to capitalize on a similar stock move or is it too difficult to predict? I have taken your Technical Analysis course and wonder if any lessons learned can be incorporated from this.

    Reply
    • Mark–I have seen this type of thing in 2001, and 2007. Also—Smaller but similar parabolic moves also in Q4 2018, Q4 2019 leading into shorter, but strong corrections. And don’t forget the FOMO of 2021 when that lead into a more prolonged bear in 2022. Its always tempting to jump on momentum. Some traders do it effectively. I don’t–or at least, I don’t have the guts to do it. So I stick with my system as described in the course.
      Of note–the above noted corrections and bear markets were managed effectively though my system. The exception was 2001, where I did not have the current system, and took it on the chin. I learned some lessons that I carried forth to create my current system. I do refine it here and there over time. But the essence of the trend rules and stops described in the course remain.

      Reply
  • Hi Keith,

    I was very happy for you when I saw the acquisition offer on CWB by NA ! I knew you had a position on CWB… I think the only bank that you held (based on what I read or listen on BNN… exposure to energy). What premium ! You deserve it ! I’m just surprised to hear that you haven’t sell at least 50% of your position right away (I would go up to 75% to 100% sell myself, but I’m not the most patient). I listen to your latest video and I understand that there is more than +10% potentially at stakes… so it’s tempting to keep the whole position to try to maximize the gain… but I know I would just take the money and run if I had such a great surprise one morning (selling a minimum of 50% on the spot !).

    It’s probably never gonna happen to me as I avoid trading individual stocks having been burned more time than I got rewarded by surprise news. I’ve been victim of bad earnings, fire in a mine, flood in another, management lies (Sino Forest)… being on the wrong company of an otherwise well-performing sector. Painful memories. I only was on the good side a few time (ex : long when Meridian Gold was acquired by Yamana Gold). Overall, I was 75% of the time on the wrong side. One day I decided to avoid the individual company level of risk. Now I’m almost only trading ETFs (sectors, indexes and commodities). I don’t regret it. But seeing a +60% in one day reminded me of how great surprises you can get once in a while trading individual stocks.

    But why wouldn’t you take the money and run ?!? +60% !!! It’s equivalent of years of good return in one night !

    Reply
    • Lou–we did sell it–yesterday (Thursday). We are out with a nice profit. Ultimately what made us decide to sell was the upside/downside potential. About 25% upside, 50% downside. We usually like to look for the exact opposite.

      Reply
      • Understood! Bravo! Emotion could lead us to want the extra bet left… the magic effect of seeing an explosive profit like that… knowing that it could be even more! But… I experienced a few times that it costed me more $ to stay in a position and hope, instead of taking the money once an extraordinary profit happens.

        Now I’m considering the time span of a trade almost as much as the % variation… something like : I buy a position, evaluating the potential about let s say 10% profit over the coming week/month or two. But if I get a +6% in 3 days…. I m often now taking profit and selling my position… or at least half of it to secure a fast and unusually good return. Sometimes I regret it but most of the time not… if the thing goes back down a few %, I jump back in it. But I understand that this is more short term trading.

        Anyway, well done with CWB!!! Keep up the good (great) work! Always eager to read your next post.

        Reply

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