Nasdaq Hits Alarming Russell 2000 Ratio Unseen Since Dot-Com Bubble

July 9, 2020 8:01 AM UTC
The NASDAQ 100/Russell 2000 ratio is at its highest level since the dot-com bubble burst, throwing caution into the insanely bullish market.
  • The Nasdaq is close to record highs once again.
  • An alarming ratio with the Russell 2000 shows an exceptionally strong correlation with the dot-com bubble.
  • Will Tesla, Apple and the tech gang have the last laugh?

As if the Nasdaq wasn’t looking bubbly enough, yet another blatant comparison with the dot-com bubble has emerged. Will this be enough to slow down the relentless bullishness in the U.S. tech sector, or will the bulls continue to run wild.

Nasdaq Boom Draws Dot-Com Comparison

It’s been a terrible few months to be a Nasdaq bear on Wall Street. Although they got the collapse they’ve been calling for for years, the massive rebound left many on the sidelines and valuations even more stretched.

Just how stretched? Well, the NASDAQ 100/Russell 2000 ratio is now at the highest level that it has been since 2001 when the chickens came home to roost and the bubble burst.

The Nasdaq is now hitting ratios not seen since the dot-com crash in the year 2000. Source- Liz Ann Sonders via Twitter

Massive unemployment, surging virus cases and generally weak economic conditions have done nothing to slow the Nasdaq’s recovery down. While it looks irrational on the charts, like all big moves in the stock market, it is founded in some truths.

First, the $trillion giants like Amazon, Apple, Microsoft and Google are all in the tech sector. Faced with an economic disaster, investors have seemingly opted for the best balance sheets they can find.

While airlines and cruises struggle with debt and former global players like Hertz fumble with bankruptcy, Apple is still buying back shares and has $billions of free cash on its books.

Faced with the U.S. Federal Reserve printing a historic amount of USD, we have once again seen money flow into asset prices. Ample liquidity has fuelled risk-taking, and it is not just the ultra-caps that have gone up hugely.

The Nasdaq is carving out a parabolic spike on its technical chart. Source- Sven Henrich via Twitter

Tesla stock has enjoyed a meteoric rise, and is now worth more than $1300 a share, making it the world’s most valuable car company.

Is it that profitable? No. Do fans think it’s going to rule the world? A lot of them do, yes.

It would appear that there is also a “stay at home” trade, seeing money flowing into the Nasdaq, as companies like Zoom actually benefit from lock-downs and quarantine.

Nordea Asset Management: Euphoria Starting To Be Seen In Nasdaq

Despite all the wild enthusiasm, Sebastian Galy at Nordea Asset Management believes that there could still be more upside, as the equity market consolidation continues on Wall Street, as he told CCN.com:

I had presumed that we were on the onset of the third and last phase of the Covid-19 rally, one devoid of the link to economic reality across a wide spread of assets. The reality is more of a continued consolidation linked to the expected path of global growth with worries about a W shaped recovery in the United States, given poor Health management and delays in a second fiscal package. There are elements of euphoria from Tesla to Chinese stocks or the outperformance of the Nasdaq, but they have not spread widely yet.

As you can see, almost every outcome, from re-opening to re-lockdowns can be spun as a positive for the index.

Most of the Nasdaq is powered by stories of growth rather than actual profit.

This works just fine when risk appetite is good but can turn around very quickly when things go wrong. If 2000 showed us anything, it’s that at some point you’ve got to start making money. I’m looking at you Nikola.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.

Samburaj Das edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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