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These 3 Warnings Suggest the Tech Bubble Is About to Burst

Last Updated September 23, 2020 2:04 PM
Chinmay Pandya
Last Updated September 23, 2020 2:04 PM
  • U.S. technology stocks are in a bubble.
  • There are signs the music could be about to stop for the bulls.
  • These signs indicate that the bubble could bust sooner rather than later.

The S&P 500 Index is nearing all-time highs after rallying from its March lows. The rally has fed off the technology bubble that continues to grow in size and scale.

S&P 500's comparison with QQQ fund
The tech-heavy QQQ fund soars beyond the S&P 500 Index. | Source: Yahoo! Finance 

While other sectors face the brunt of the pandemic, the tech sector has almost become a haven for investors.

Although the tech bandwagon has enjoyed strong returns so far, it is clearly a bubble. Investors may already be fleeing.

Forbes’ AI rated the Invesco QQQ Trust (QQQ) a ‘top short,’ last week  due to massive outflows from the fund.

ETF outflows
Are investors already running for the hills? | Source: Etf.com 

The tech bubble has inflated dramatically, and these signs indicate the party could come to a brutal end soon.

Sign 1: Tech Stocks’ S&P 500 Weightage Mirrors 1999 Bubble

So far, the tech bulls have partied like its 1999. As a result, the S&P 500’s technology sector weighing has reached record levels.

S&P 500 technology sector weight indicating tech bubble
S&P 500’s tech weightage has risen to record levels. | Source: Twitter 

At the peak of the dot-com bubble, tech stocks made up 35% of the index. Now, technology stocks weigh 37%. Are tech stocks today heading for a similar fate as they did in 1999?

Sign 2: Tech stocks outperform U.S. banks

U.S. banks have started reporting dire Q2 2020 earnings already. 

Historically, tech stocks’ outperformance over U.S. banks has led to terrible consequences.

Tech stocks vs US banks
Tech stocks have outperformed U.S. banks once again. | Source: Isabelnet 

The last time tech stocks outperformed U.S. banks; the world went into the great recession. Before that, it was the tech bubble that burst and rendered millions broke.

Sign 3: Widely-Followed BofA Strategist Sounds Alarm

Two weeks ago, Bank of America’s Chief Investment Strategist Michael Hartnett  said:

If tighter monetary conditions are to pop the tech bubble, we think it would happen in China first.

If his thesis is correct, there’s reason to worry, as tech stocks have already rallied to new highs in China.

the Chinese tech bubble
The Invesco China Technology ETF (CQQQ) has already started retracing. | Source: Yahoo! Finance 

Not only have Chinese technology stocks rallied, but they also seem to have hit the ceiling after reaching all-time highs. A hefty correction could be overdue.

Several Pins That Could Pop This Bubble

It is impossible to predict when this bubble might pop and what the catalyst might be.

The U.S. government’s stimulus program is due to expire at the end of the month, so a new round of money printing would be needed to keep the market pumping.

U.S. government’s helicopter money was pulled out of thin air , with the Federal Reserve being the biggest buyer of the debt.

While some used the stimulus checks to survive, many decided to gamble in the stock market. This inflated the overall market bubble along with the tech bubble, as retail traders flooded the market. 

Excessive money printing inflates the stock market, causing significant distortions with the real economy.

It looks like another round could be beginning , and this could end up inflating the tech bubble further. At the same time, the pandemic continues to worsen in many states , forcing businesses to close down once again.

The question remains, how long can the Fed continue to print money before inflation fears force them to raise interest rates once again? Only time will tell.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.