Another Dangerous Tech Mania?

Leo Kolivakis  |

A couple of weeks ago, Kellie Ell of CNBC reported, The tech sector now is reminiscent of the 1990s dotcom bubble:

This week, Stephanie Landsman of CNBC followed up, A dangerous dot-com era phenomenon is back and it's going to inflict pain, market watcher Jim Paulsen warns:

It's Friday, tech stocks have been on a tear since I wrote my comment back in February explaining why I thought it was another correction, not something worse.


Have a look at the daily and weekly chart of the S&P Technology ETF  (XLK) over the last year and five years (click on images):

What do these charts tell me? They tell me that in the short run, there may be a pause in this tech rally but that's not a given because the longer-term monster move is still there, making new highs on the weekly and monthly charts. Why are tech stocks on fire? There definitely are many crowded trades in the tech space as big hedge funds with billions under management are looking to buy the same big tech names.

Just go look at what top funds were buying last quarter to get a sense of how most of the big funds all clamored into big tech stocks during the sell-off in Q1. Facebook  (FB) down? Buy! Amazon  (AMZN) down? Buy! Netflix  (NFLX) down. Buy, buy, buy! And so on and so on.

Just look at the 5-year weekly chart of Netflix  (NFLX), it's already parabolic and the scary thing is it might go even higher even though I think it's getting extended here:

So what else is driving this renewed mania for technology stocks? Well, for one thing, earnings. Big tech stocks might have a high P/E but unlike the 1999 hope & hype, they're producing billions in earnings and literally look unstoppable, much like the US economy.

In fact, in his latest weekly comment, Trade Wars Means Fed Overkill, David Abramson of Alpine Macro notes the following on why a tech mania may be emerging:

You will need to read David's fascinating comment at Alpine Macro (contact info@alpinemacro.com) to get the details but he basically goes over why even though the tech sector is vulnerable to a correction, the long-term rally isn't over yet.

But there is another reason why many portfolio managers are buying large-cap tech stocks here, they're a defensive play on a slowing economy. In his interview with Consuelo Mack of WealthTrack, top-ranked portfolio strategist François Trahan of Cornerstone Macro explained the changing market leadership and why it’s predictable.

What François told me is we're at an inflection point where leading economic indicators have peaked, the US economy is slowing but it's still doing well, so portfolio managers see large-cap tech shares as part of a Risk-Off trade (go see my Outlook 2018: Return to Stability for why large-cap tech is a defensive play initially when leading indicators peak).

Will this tech rally last forever? Of course not, but it could last a lot longer than what we think. One thing François told me: "It will end badly and that's when defensive sectors and US government bonds will do well."

What if you don't like high-flying tech shares like Netflix? No problem, use the weakness in consumer staple shares  (XLP) like Kraft-Heinz  (KHC), Campbell Soup  (CPB) or Procter & Gamble  (PG) to ride out the latest tech mania if that is indeed what is going on.

Since the begining of the year, I've been recommending more stable sectors like healthcare  (XLV), utilities  (XLU), consumer staples (XLP), REITs  (IYR) and telecoms  (IYZ) but this market only wants more tech  (XLK) because it's transfixed on earnings growth and there's still a worry that rates are headed much higher, capping the performance of safe dividend sectors.

We'll see what happens, there might be another tech mania on its way driven by quant hedge funds and passive index funds but it's too soon to tell whether we're there yet.

I remember 1999-2000 like it was yesterday. I also remember 2008 like it was yesterday. Some things you never forget. This isn't 1999-2000 or 2008, at least not yet.



And while everyone is impressed with Netflix, check out the performance of some of these small biotech  (XBI) shares like Madrigal Pharmaceuticals  (MDGL) or Sarepta Pharmaceuticals  (SRPT) over the last year (click on images):


Now, if only someone can tell me whether shares of Tesaro  (TSRO) are finally bottoming out here and ready to rip much higher and sustain their gains (click on image):

That's why they say "biotech is BINARY"! Don't chase these or any of the stocks mentioned in this post. I'm just trying to show you there's a lot more to this market than large-cap tech stocks.

Below, some stocks moving up on my watch list Friday afternoon (click on image):

And no, they're not just biotech stocks even though that is my primary focus. Again, don't chase these or any stocks, especially if you don't know what you're doing, you will get burned alive.

I can say the same for all those young Canadians buying pot stocks for their TFSA portfolios, the funny thing with momentum, it works well on the way up but when the floor gives out, OUCH!!

But nobody seems to care, lots of people are getting high on pot stocks. Enjoy your buzz brothers!

As for the rest of you, you can play momentum, chasing large-cap tech stocks along with those big quant funds taking over the world, just be careful, when the music stops, it's going to be brutal and you're going to wish you bought some Kraft-Heinz (KHC), Campbell Soup (CPB) or Procter & Gamble (PG) or good old US long bonds  (TLT) to protect your portfolio from getting slaughtered.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
FB Facebook Inc. 209.88 -0.06 -0.03 6,909,331 Trade
GOOGL Alphabet Inc. 1,206.34 8.46 0.71 807,568 Trade
AMZN Amazon.com Inc. 1,798.77 -14.93 -0.82 2,166,182 Trade
SRPT Sarepta Therapeutics Inc. 132.41 -0.90 -0.68 303,605 Trade
NFLX Netflix Inc. 358.88 -2.18 -0.60 5,657,063 Trade
XBI SPDR Series Trust S&P Biotech 99.49 -0.64 -0.64 858,451
XLK SPDR Select Sector Fund - Technology 72.45 -0.11 -0.14 2,594,253
MDGL Madrigal Pharmaceuticals Inc. 284.79 -2.26 -0.79 42,558 Trade

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