The Tech Summit Push

Romain/ juillet 21, 2020/ Finance/ 15 comments

In mountaineering, the death zone refers to altitudes above a certain point where the amount of oxygen is not sufficient to sustain human life for an extended life span.

In finance, the death zone could be defined as euphoric market conditions with stocks trading above 30 on a Shiller PE basis. Like professional climbers, experienced and wise investors might stay away from danger, but many undisciplined traders might get caught by an avalanche.

Fed Put and Fear of Missing Out

Recently, I wrote a post explaining that US markets are mainly dominated by the “Fed put” narrative (see The Fed Put Narrative Era). However, this analysis was not entirely complete as markets are also driven by an overwhelming willingness to buy Nasdaq stocks. Thus, technology has become the most crowded trade ever (see chart below).

In other words, the real dominant narrative seems to be a mix of the Fed put and FOMO, both being two sides of the same coin. On the one hand, investors believe that markets cannot fall thanks to the central banks, and on the other hand they hurry to invest int the names that almost everyone has identified as “long-term winners”.

From Extreme Appetite…

The problem is that we might be close to another major peak of expectation. Just like in 2000, investors are now willing to pay whatever price to step foot in the digital revolution.

It is fine to be a tech enthusiast, and to believe that we are a still at the beginning of a long and deep transformation of the economy. Nevertheless, it is a slow process that takes time, and people should be disciplined and patient to pick the right names at the right time.

Today, someone buying Amazon shares at $3,200 is paying a 160 PE, meaning that it would take at least one century before being breakeven. Of course, Amazon is a great machine, but even Jeff Bezos would not make such an assumption as he like to remind that “one day, Amazon will fail”.

Beyond big tech giants, many investors are afraid to miss the train of promising technologies such as electric-vehicles, hydrogen, interstellar travel, artificial intelligence, etc. But the Gartner hype cycle should remind us that the safest way to invest in such thematic is to wait for the burst of the hype bubble.

…to Disillusionment

When investors start to lose interest in a technology, shares drop and reach a “through of disillusionment”. It is the beginning of a new period that offer time and better opportunities to bet on structural changes and potential winners, despite high uncertainty and many skeptics.

The most spectacular example was the 2000 peak. After the burst of the dot-com bubble, people were so frustrated about the fall of internet companies that it took more than ten years for Wall Street to get excited about tech names again. Even in 2015, you could still find people claiming that companies like Amazon would not become very profitable.

Today, all the skeptics have capitulated, everyone has turned bullish on tech and most investors are willing to get on the train whatever it takes.

Multiples analysis is not rocket science. High price-to-earning or price-to-sales ratios means that there is no margin safety. Remember that around 90% of so-called “unicorns” are set to either run out of steams or simply fails.

Avalanche Warning Signs

While the “Buy Tech, The Fed Has Our Back” narrative has become overwhelmingly dominant, the market is telling us that this situation is not right, as the bull-bear-fight has become more and more intense (see chart below).

I have already explained that such an acceleration of fluctuations is characteristic of ending asset bubbles (see It is All About Waves – Tech Stocks and The Log-Periodicity Power Law Singularity Model). And the conclusion of the LPPLS model has not changed: the frenzy might end soon.

More Dangerous Than K2?

While numerous investors are considering the summit push on Nasdaq, most of them seem to believe that the weather will remain sunny and that the snow will remain stable. Besides, they are entering the death zone without oxygen supply, and many of them have forgotten what happened to 2000 climbers.

Hard work and/or luck pay off, but everyone should remember that it is nature that rules this world. In other words, never bet against nature!


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