"Rally of everything" is doomed: sell Nasdaq100

27 thg 12, 2019

The U.S. stock market has seen a new all-time high. The bubble in the US stock market and the "deal of the decade." We are, of course, talking about sales on the US stock market also - shares of the technology sector (Nasdaq100).

The ultra-soft monetary policy, which became the main trend for global central banks after the global financial crisis of 2007-2009, led to price bubbles: stock markets (especially the US and emerging markets), corporate lending (USA and China), bond markets (China and the USA), real estate (EU, China, Canada and the USA), etc.

That is, we have a situation that can be called "a rally of everything." When investors buy everything indiscriminately, simply because they have too much money.

The ugliest and largest bubble has inflated in the technology sector of the US stock market. In its scale, it has long exceeded the dot-com bubble (and then, recall, Nasdaq lost 80% of its capitalization in just over a year).

For example, Apple shares grew by more than 80% (!) over the year, and the company's earnings have remained essentially the same over the years. Even though the company has already squeezed out all the juices from its flagship iPhone (it generates more than 60% of the company's revenue).

Why the market has not crashed yet if everything is that bad? We have already answered this question, but we will repeat: the Fed’s refusal to raise rates in 2019 and 3 rate cuts breathed new, but completely artificial life into the rally. Add to this the conclusion of the first phase of a trade agreement between the US and China and get a temporary injection of optimism.

Recently, markets have generally switched to artificial life support - meaning a sharp expansion of the Fed's balance sheet due to operations in the REPO market.

That is, the patient is already dead. Just waiting for taking off life support. The rally of everything always ends badly for investors. For example Japan in the 80s of the 20th century and the “lost decade”.

The sharp increase in gold in recent years proves the fact that growth is at the terminal stage. The simultaneous growth in demand for risky assets (stock market) and safe-haven assets looks very illogical.

In general, the number of inconsistencies and various anomalies has long exceeded the critical level. Everything suggests that the end is near. In our opinion, the Fed’s decision to return to the cycle of increasing interest rate will collapse the bubble. The reason for this may be a rise in inflation caused by a sharp expansion of the Fed's balance sheet. Logically, a significant increase in the supply of money will lead to a drop in its value, to inflation.

Recall that we consider 2019 the last year of unjustified growth in the US stock market. Already in 2020, it will begin to adjust. The scale of correction is from 50% and higher. Given that in recent years, shares value of technology companies in the US stock market have grown by 7-8 times (and some issuers have shown growth of 10 or even 20 times), the US stock market will become the object of massive sales. We recommend participating in this process, selling both the market as a whole (Nasdaq index) and the shares of individual issuers (Apple, Microsoft, Alphabet, Oracle, etc.).