CAMS Weekly View from the Corner - Week ending 9/27/24
September 30, 2024
If the stock market were a movie the central plot would be focused on what direction it would be moving toward trend wise.
A subplot if you will is developing within the big picture of the stock market that is offering a key segment of recent historical stock market leadership is showing signs of early exhaustion.
Identifying leadership within a stock market trend is always important and then observing that leadership for change in behavior aids in deciphering the messaging left in the wake of collective participants’ market operations.
Let’s take a big picture view of the stock market to aid in ferreting out participants’ messaging.
First we must share some backdrop for clarity.
If you multiply the number of shares a company has outstanding by its current share price you get the total value of the shares outstanding and hence its total market value. This is known as a company’s “Market Capitalization.”
We can do the same for the overall value of the stock market by combining the total market value of the listed companies on the NASDAQ and the New York Stock Exchange (NYSE.) In this case it is known as the “Total Stock Market Capitalization.”
There is nothing complicated here as we are only applying basic math to come up with a current total market value.
Here is where it can get interesting.
There is a well recognized area or segment within the overall stock market that has proven to get ahead of itself relative to how much of a role it plays in the total value of the overall stock market as described above.
Said differently and more accurately, collective market participants are known to bid up this well recognized segment relative to the overall stock market and in so doing their collective enthusiasm gets ahead of themselves at times.
This is known as discounting the future.
In the case of said participants getting ahead of themselves in over enthusiastically pricing assets it is known in slang as discounting the hereafter. In this reference it is viewed that they are not only discounting the future in how they are pricing assets today but also discounting life beyond time.
The segment in question is collective technology oriented companies or “Tech Stocks” as they are known as collectively.
The NASDAQ Exchange – the Land of Tech Stocks
The National Association of Securities Dealers Automated Quotations (NASDAQ) is an exchange that is heavily weighted toward Tech stocks.
Through the NASDAQ we can calculate its total value, i.e. its total market capitalization and then get a sense of how enthusiastic collective market participants have been in bidding up Tech shares by viewing its history of such relative to the total stock market value.
When the NASDAQ plays an ever larger role in the total value of the overall stock market landscape it offers a potential Tell that collective participant’s may be ahead of themselves with their enthusiasm for this segment.
We have to add here a general qualifier in that technology has played a larger role in society as recent decades have unfolded. With this we can expect this segment to play a larger role in the total value of the overall stock market. Through this lens a general increase in its percentage of the overall stock market value would not be an abnormal development.
What is abnormal or said differently a Tell that collective participants are overenthusiastic in bidding up Tech shares are when their overall value as a percentage of the value of the overall stock market spikes.
This too can be subjective in that when collective participants are in full bull mode they can bid up to levels never thought possible. There is no magic level that offers with guaranteed certainty the end is near.
An antidote to potential misplaced subjectivity is to add an additional layer to our observation of this overall relationship to help ascertain if collective participants have exhausted themselves with their overenthusiastic bidding up of Tech shares.
Through this we look for solidifying information that they collectively are beginning to realize they have went too far with their Tech stock enthusiasm.
We share the above view courtesy of our friend Ron over at the Chart Store. We are viewing the aforementioned NASDAQ market capitalization (total value) as a percentage of the total value, i.e. the total stock market capitalization. The above dates back 40 years for perspective via recent history.
Earlier we described how technology has played an ever larger role within society and with this a general increase in technology companies total value relative to the total value of the stock market makes sense.
The spiking of those values is where we can get a Tell that collective participants may be leaning too heavily toward them relative to other areas of the stock market landscape.
We offer two casual upward sloping red lines in the chart from back in the 1990’s as well as in recent years. We then see a spike depicted by our red arrows both in late 1999 and then more recent time. In chart analysis lingo this is known as a “blow off top.”
Once a blow off top is unfolding we then look for behaviors that offer participants are getting less enthusiastic about continuing to push the segment to ever higher levels in value relative to the overall value of the stock market.
Our small red circles denote this reduction in enthusiasm if you will as they made a secondary attempt to continue to push the spiking trend higher but failed to do so in the case of the late 90’s spike and are attempting a failure current day in the far right of the chart.
Also note how high our current day percentage (whopping 50%) is compared to the ultimate spike peak back in the Tech blow off top of the late 1990’s.
The above does not offer guaranteed certainty (no one indicator in economics or market analysis ever does) that Tech leadership has begun its initial foray into being a relative underperformer but collective market participants have begun to chirp that such is the case.
In addition there is corroborating evidence through other optics that offer Tech leadership is and has been waning.
We share this observation in what may prove to be very early in the process of said potential underperformance. If this continues to unfold it may come as quite a surprise to most how poorly beloved Tech stocks perform as the near future shares its story.
This is yet another interesting developing storyline unfolding within the overall markets’ landscape. We will share more on this observation as time unfolds.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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