Nasdaq/SP500 spread: one more the bubble signal

We have repeatedly written about various signals that testify in favor of the presence of a huge bubble in the US stock market: this is a rise in market prices, divorced from the economy, which manifests itself in the historical highs of the "favorite Buffett indicator", these are the values of the basic investment multiples in the zones exorbitant overvaluation, this is the dynamics of CAPE Schiller and much more.

Today we’ll talk about another interesting and significant metric. It's about the Nasdaq/SP500 spread. In fact, we are talking about the difference in the growth rate of the Nasdaq and SP500. Since these are indices of the same stock market (USA), in a theory they should change more or less synchronously. But the experience of the dot-com bubble has shown that there are times when one index begins to overtake another.

For example, in the case of the dotcom bubble, the spread between the indices was 200%, that is, the high-tech sector grew 2 times faster than the US stock market as a whole. How it all ended, we think everyone knows. Just in case, recall that the Nasdaq index then lost about 80%.

The dotcom bubble is considered a classic illustration of market insanity.

What is the situation now? Currently, the spread between the Nasdaq and the SP500 is 500%! That is, we have a situation that, in terms of the scale of madness, exceeds that which was on the eve of the collapse of the dot-com bubble 2.5 times!

The historical analogy is obvious: the current bubble has long been in the terminal stage and should burst. Whether this will happen here and now, or will it begin after some time - the question is still open. But the presence of the largest bubble in the history of the US stock market can be ascertained here and now.

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. Considering that in recent years, shares of technology companies in the US stock market have grown on average 7-8 times (and some issuers have shown growth of 10 or even 20 times), the US stock market will no doubt 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.).