Bubbling Up Into a Slowdown

Most bubbles occur in an environment of economic optimism with strong global growth, rising commodity prices, and rising bond yields.  That is what happened in 1999/2000, in 2007 (not a stock bubble, but a housing/credit bubble), and 2021.  This is unlike any of those bubbles.  This economy is slowing down, as shown by both the economic data and real world price signals such as commodities.  Here is a list of some industrial/housing commodities which are showing weakness in the face of this SPX/NDX bubble.  

We are seeing a huge disconnect between tech stocks and the rest.  Institutional investors are fleeing stocks showing weakening growth trends and crowding into the few remaining favored growth names, which are blessed with the AI halo effect.  In the internet bubble in the late 1990s/2000, you had strong economic growth worldwide.  In this AI fueled bubble, you have economic growth that is inflated by under reported inflation and US fiscal largesse.  Yet even the butchered government data is showing a slowdown. In addition to the economic data, which are lagging and often heavily revised, you can just look at the performance of the majority of US stocks to see proof that the economy is slowing.  

The equal weight S&P 500 ETF, RSP, is lagging SPY badly in the past few weeks.  

 

While breadth is an overrated short-term indicator, over the long term, weakening breadth in a very overvalued stock market is a reliable sell signal.  It warned of impending bear markets/corrections in summer/fall of 2000, fall of 2018, and fall of 2021.  

While the fundamentals are getting more bearish as prices go higher, you have to respect the upward momentum which attract more funds into the SPX and NDX complex.  Foreign holdings of US financial assets in equities is at an all time high, rivaling those levels last seen in late 2021, and slightly higher than the peak in 2000.  Foreigners are usually late coming into a trend and notorious for chasing hot assets and dumping them when they lose favor.  

 

The warning signs are piling up.  It is happening at a time when valuations of US stocks, in particular, large cap tech stocks, is in nosebleed territory.  While these large cap tech stocks have great asset light businesses with fat profit margins, they will have problems maintaining growth as most of their businesses (aside from AI) are becoming mature with slowing growth rates and running into the law of large numbers.  AAPL is already showing basically no revenue growth, as the smart phone market is now saturated and no longer a growth business.  Same goes for internet advertising, which is dominated by GOOG, META, and even AMZN.  Future sources of earnings growth for these tech giants will have to come from cutting expenses (reducing head count), which is a net negative for the economy. 

There is still 6 months left in the year, and momentum bubble markets like this usually don't make major tops in the summer.  The Nifty Fifty bubble topped out in January 1973.  The Nikkei bubble topped out in late December 1989.  The dotcom bubble topped in March 2000.  The everything bubble topped out in early January 2022.  With an election coming in November, and with recent memory of big post election rallies in 2016 and 2020, its likely that you will see investors chase US stocks higher into year end.  Odds favor a top happening either in late December or early January.  That doesn't mean that you won't see pullbacks along the way, and you cannot rule out this market bucking past stock market history and topping out in the summer.  

Remain short and added more into the rally yesterday.  Still playing for a pullback for the remainder of June.  Considering the strength shown recently, the pullback is probably going to be weaker than originally expected.