Editor's note: We're getting close to a major buying opportunity in stocks. But not every sector will be a winner. Today, we're joined by Pete Carmasino – chief market strategist at our corporate affiliate Chaikin Analytics – as he sounds the alarm on a dangerous pattern in the markets...
The Internet boom was just getting started in the mid-1990s...
The tech-heavy Nasdaq 100 Index closed around 570 points in December 1995. And by March 2000, it had surged to slightly more than 4,800. That's a roughly 725% gain in four-plus years.
As a young broker at the time, I was flying high along with the markets. I worked 12-hour days. And I thought I knew everything.
However, as it turned out... I didn't. Nobody does.
By the time tech stocks started turning lower in the early 2000s, I was a sales trader. And I remember what a struggle it was to go to my desk each day...
Stocks were coming off one of their biggest runs higher in history. And as a relatively new trader, I was doing what I could to help my clients during a period of high volatility.
But I could have done more...
You see, if I had known what to look for, I could have helped them avoid the worst of the "tech wreck." In the second week of August 2001, the Nasdaq 100 triggered a signal. And I missed it.
That's because specifically, this signal popped up on the ratio chart of the Nasdaq 100 against the SPDR S&P 500 Fund (SPY). And after it triggered, the Nasdaq 100 fell another 50%.
This is important to know right now...
You see, the same signal is flashing once again. And we're not going to miss it today.
I first told our Chaikin PowerFeed readers about a so-called "death cross" unfolding in this ratio on November 10. A little more than a month later, it has now triggered.
And unfortunately for investors, this signal is about as clear as it gets. It tells us that serious risk remains ahead in tech stocks...
The Nasdaq 100's first crash started in March 2000. After hitting an intraday high of about 4,816 on March 20, the index fell to around 2,900 that May.
A brief rally ensued. But in November 2000, the Nasdaq 100 finally broke the previous low.
That led to a series of "lower highs" and "lower lows" for nearly two years. In October 2002, the Nasdaq 100 finally bottomed at around 800. It had fallen about 83% from its peak.
That brings us to what's happening today...
The Nasdaq 100 climbed as high as around 16,500 late last year. It's trading at about 11,000 right now. That's a more than 30% decline.
And yet, tech stocks are still overpriced. Consumer-electronics giant Apple (AAPL), for example, continues to trade at a price-to-earnings (P/E) ratio of nearly 22.
That might not seem high because we've been programmed in recent years to think P/E ratios like that are normal. But they're not. The business will need a huge jump in growth to justify that P/E ratio.
Also, Apple makes up more than 11% of the Nasdaq 100 today. Back in May, the stock only accounted for 7% of the index.
Today, the whole index is at a turning point. And these overvalued tech stocks are in trouble. You can see what I mean on the ratio chart that I mentioned earlier...
Now, this weekly ratio chart is a little different from what we normally cover in this publication. But I want you to notice one important takeaway...
Today's setup is eerily similar to the "death cross" that happened in August 2001.
A death cross typically occurs when an asset or ratio's 50-day moving average moves below its 200-day moving average... In other words, that's when the short-term trend line dips below the long-term trend line. Since we're using a weekly chart, we're instead referring to the 50-week and 200-week moving averages.
Now that this signal has triggered, we should talk about the potential downside...
I don't think the Nasdaq 100 will plunge a total of 83% again this time. But I don't have a crystal ball. So I can't say for certain what will happen from here.
I also don't need one, though. The chart shows us everything we need to know...
Simply put, the future doesn't look good for tech stocks. Avoid this sector for now.
Editor's note: Investors need to pay attention today... because now, with another rate hike behind us, Chaikin Analytics founder Marc Chaikin believes a brand-new road map is in place for the market (and your money) in the early days of 2023. Many analysts are missing it completely... And it could be disastrous for those who don't see it coming.
So make sure you listen to Marc explain why the path forward for stocks just changed dramatically. You can still get all the details right here.
"History tells us that investors can stay skittish – even when the worst is over," Marc Gerstein says. We've seen this before in times of inflation. And one modern twist of sentiment will make it even harder for stocks to bounce back... Read more here.
The slide in Big Tech stocks echoes the dot-com bust in many ways... But this time, the players are different. Read more about what's driving the decline – and what it means for folks looking to "buy the dip" – right here.