How much more parabolic can the Nasdaq go? I think it’s on borrowed time.
Here’s the biotech sector, which has been a key driver of the index’s outperformance this year, overlaid on the same sector’s performance into 2000:
You know the dot.com bubble story: ‘regular’ valuations were dismissed and ‘ potential expectations’ became more important than profits. Biotech is largely a sector that always has to be valued on expectations – so the recent rally is speculative, but not (yet) to the craziness degree of 2000.
Another hot Nasdaq sector of late is social media. Twitter up 6% yesterday and valued at $28 billion – yet it has no profits and is not expected to turn a profit until 2015 at the earliest. Facebook is now the 8th biggest Nasdaq company by valuation but trades on a tailing p/e of 128 and a forward p/e of 44 – again ‘justified’ by expectations. Linked In is valued at $28 billion and trades on a trailing p/e of 911 and a forward p/e of 118.
Amazon is the 4th largest Nasdaq company currently by market cap, but trades on a trailing p/e of 1405 and a forward p/e of 144. You get the drift – the same phenomenon as in the dot.com boom is being seen across a range of Nasdaq companies, namely of expectations-driven speculation. But here’s why I think the parabolic is on borrowed time:
Up into 2000 we had a collective positive net investor demographic trend in the major nations aside Japan (first chart), i.e. a steady stream of new investors to the market. These investors then leveraged up to the max (second chart). Demographics also accounted for strong global growth into 2000 and increasing trading volumes.
Here in 2013, we see the same extreme leverage levels have been reached, but demographic trends of this era mean there are a dwindling number of investors, and this is reflected in declining trading volumes. Negative demographics also mean this is a time of meagre economic growth. In short, a shrinking investor population who are ‘all in’ against a poor economic backdrop.
A last chart: the Nasdaq 100 in a tidy bull market channel since 2009 and a rising wedge over the last several months that looks ripe for resolution.