HISTORY SUGGESTS THIS IS NOT ANOTHER TECHNOLOGY BUBBLE -- COMPARISON TO 2000 SHOWS WHAT A TECH BUBBLE LOOKED LIKE -- SECTORS IN A BUBBLE ARE USUALLY MARKET LEADERS -- TECHS ARE MARKET LAGGARDS
NASDAQ MAY BE OVERBOUGHT, BUT NOT IN A BUBBLE... There's been a lot of media talk recently about another "technology bubble". While the group may be over-extended (more on that shortly), talk of a bubble seems misguided. Here's the thing about bubbles. While we may not be able to explain exactly what constitutes a market "bubble", we can usually tell one when we see it. Chart 1 shows the Nasdsq Composite Index (which is driven mainly by technology stocks) having risen to the highest level in 13 years. Its 14-month RSI (red line) has reached the most overbought territory since 2000. [The last time the RSI was over 70 was during 2007 which preceded a severe market selloff]. So the Nasdaq is definitely overbought which could lead to a downside correction or a period of consolidation. But is it in a bubble? Chart 2 shows what a bubble looks like. The blue line plots a ratio of the Nasdaq Composite Index relative to the S&P 500 (flat black line) since 1990. From the start of 1999 to the spring of 2000, the technology-denominated Nasdaq outperformed the rest of the market by 700%. That's what a bubble looks like. Compare that to the more modest rise in the blue line since 2009. The blue line shows the Nasdaq/SPX ratio at a new 13-year high, but nowhere near the bubble-like condition that existed at the start of 2000.
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Chart 1
Chart 2
BREADTH NUMBERS ARE A LOT STRONGER THAN IN 2000... Another way to look for signs of a bubble in one part of the market is to look at breadth figures. Chart 2 compares the rising trend of the Internet Index (black bars) to the NYSE Advance-Decline line (red line) between 1997 and 2000. Starting in 1998, the NYAD line started dropping and continued to do so throughout 1999. During those two years, the internet group (and technology in general) was surging while the rest of the market had already peaked. That suggested a technology bubble that was totally out of sync with the rest of the market. Chart 4 compares the 1998-2000 performance to the current one. While the NYAD line fell between 1998 and 2000, it is currently leading the market higher. That's a sign of strength, not weakness. And doesn't suggest a technology bubble.
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Chart 3
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Chart 4
TECHNOLOGY SECTOR LAGS BEHIND S&P DURING 2013... If technology were in a bubble, we would expect it to be doing much better than the rest of market. During 2013, however, four market sectors have led the market higher -- healthcare, cyclicals, industrials, and financials. Chart 5 shows the relative performance of those four leaders and technology. It's clear that technology has been a market laggard during 2013. Technology has gained only 19% versus 25% for the S&P 500. That's in stark contrast to 1999 when technology was the only market sector to do better than the S&P 500. Sectors that are in a bubble lead the market higher, not lag behind it as in 2013.
Chart 5
FINANCIALS ARE STILL PLAYING CATCHUP... No one would accuse financial stocks of being in a bubble. In fact, it's just the opposite. Although they're showing market leadership, they're still playing catchup to the rest of the market. The monthly bars in Chart 6 show the Financials Sector SPDR (XLF) trading at the highest level since 2008. The XLF, however, is still well below its 2007 peak. The reason for that weaker performance is explained by the XLF/SPX ratio (gray area). The plunging gray line shows that financials fell much harder than the S&P between 2007 and 2009. They're still trying to make up for that lost ground. The good news, however, is that the XLF/SPX ratio turned up during 2012 and is still rising. That makes financials one of this year's market leaders while still being one of the market's most undervalued sectors.
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Chart 6
FINANCIALS REACH NEW HIGHS... Over the last month, financials have gone from seventh to first place in relative strength rankings. [The XLF rose to second place last week and first place today]. The daily bars in Chart 7 show the Financials SPDR (XLF) trading at a new five-year high. More importantly, its relative strength line (gray area) has jumped during November after lagging since July. A lot of that new strength is coming from banks. Chart 8 shows the Dow Jones US Banks Index ($DJUSBK) breaking through its summer high. Its relative strength line (above chart) is turning up as well. Bank stocks are today's strongest financial group and are leading the sector higher.
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Chart 7
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Chart 8
JP MORGAN BREAKS OUT -- WFC IS RIGHT BEHIND... The strongest part of the banking sector has been smaller regional banks, many of which have hit 52-week highs. Some bigger banks, however, are just now starting to break out to the upside. Chart 9 shows J.P. Morgan (JPM) rising nearly 2% today and trading above its July high. JPM is now trading at a new record. It also happens to be the biggest weighted stock in the XLF. Chart 10 shows the second biggest stock in the XLF -- Wells Fargo (WFC) -- trying to break through its summer high to a new record. It's normally a good sign for the rest of the market when financials are leading it higher -- and banks in particular.
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Chart 9
