“This really isn’t that complicated a call”, Canaccord’s Tony Dwyer and Michael Welch write, in a note slashing their market outlook to neutral from positive.
If you’ve kept yourself apprised of recent events, you can probably guess what might prompt some strategists to cut their near-term outlook for equities, even as they remain generally positive.
Hint: It’s the relentless run-up in tech shares, which have now hit what feels (and looks) like escape velocity, having outperformed the broader market in seven of the last eight months, and 10 of the last 12.
We’ve cited the weekly RSI for the Nasdaq 100 on a number of occasions lately. A quick snapshot of the same for the S5INFT betrays a nosebleed reading of 82.
That’s only happened four other times in the past 30 years, and each time it marked “an almost immediate peak”, Canaccord remarks, adding that “Info Tech has led the market to a position that is excessive and has generated temporary pullbacks in the past”.
In addition to being common sense, this is consistent with the thesis expounded by Morgan Stanley’s Mike Wilson last week. Wilson – who is pseudo-famous for his bearish call on tech in July of 2018 – warned earlier this month that relative earnings in tech have become completely disconnected from the price action.
“Tech’s relative performance has significantly overshot relative to forward earnings”, Wilson wrote last week. “In fact, relative forward earnings are essentially flat since November of 2017, while relative performance for the tech sector is up 26%”.
Still, Canaccord isn’t calling a top in tech. Even if this is “a” peak, it’s not “the” peak, the bank writes. To wit:
It is important to note that none of the [past] occurrences [of the weekly RSI hitting 82] were anywhere near “the” peak, but each was nasty enough to warrant a more neutral position until the sector corrected. Even after the 1995 occurrence that saw a very brief initial pullback, you could have bought the sector at a better price in the early 1996 market melt. Our fundamental core thesis and history do NOT suggest the market is on the precipice of a major market decline, but our four key tactical indicators… point to an environment ripe for a temporary but potentially nasty drawdown that should provide excellent entry point into equities.
So, that’s the silver lining. If you were looking for a real dip to buy, you might just get one.
If you’re wondering what (or, more aptly, “who”) to thank for the current state of affairs, you can refer to the bottom pane in the following visual:
Although we’ve generally adopted an upbeat tone of late, we didn’t mince words over the weekend on tech. It’s a bubble – full-stop.
As is clear from the above, we’re hardly alone in finding the space stretched.
Read more: Tech Is A Bubble Again. Sorry.