CLSA analysts Laurence Balanco and Jonathan Estrada argue that tech stocks don’t yet meet the requirements of a bubble
Frank Holmes | September 14, 2020 | SmallCapPower: Something else Montier doesn’t bring up in his whitepaper is that tech stocks have driven much of the U.S. market’s gains since March. Were it not for a handful of them, the S&P 500 may have performed more in line with other economies’ stock indices.
(The following is an article originally published on usfunds.com on August 24, 2020)
Between the market bottom on March 23 and August 20, shares of Apple, Amazon, Microsoft, Facebook, Alphabet and graphics processor designer NVIDIA were responsible for an incredible 33 percent—an entire third—of the uptrend in the S&P 500.
Apple alone was responsible for more than 11 percent of the market’s moves. Last week, the iPhone-maker became the first U.S. company to surpass $2 trillion in market capitalization, nearly as much as all the companies in the Russell 2000 Index of small-cap stocks combined. Apple is now valued more highly, in fact, than German stocks in the Deutsche Boerse Index and is closing in on Canadian stocks in the S&P/TSX Composite Index.
And then there’s Tesla, whose stock we really like. Tesla isn’t a member of the S&P 500 (yet), but its shares cracked $2,000 last week ahead of its stock split, bringing its market cap to $370 billion. As of Wednesday, that was enough to make the electric vehicle manufacturer more valuable than Walmart.
Some see a bubble forming. But in an interesting report dated August 12, CLSA analysts Laurence Balanco and Jonathan Estrada argue that tech doesn’t yet meet the requirements of a bubble, based on observations from the past 43 years. Those seven criteria are: 1) price gain of 555 percent over a 52-month period, 2) rising trend for four years or more, 3) gains of over 119 percent over the past 12 months, 4) 55.7 percent premium to its 200-day moving average, 5) 10-day average true range (ATR) of over 2.4 percent (volatility), 6) prime momentum divergence and 7) churning price action or a V-shaped reversal pattern.
According to Balanco and Estrada, the Nasdaq 100 (tech stocks) meets only three of those seven criteria, as does the price of silver, which some people have also said may be in a bubble.
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