Bond King Jeffery Gundlach presented a remarkable chart, one showing that the ratio of the NASDAQ to the S&P 500 has been pulled lower (due to NASDAQ under-performance coupled with strength in value stocks) and is now right on its dot com bubble peak levels.
Picking up on this chart, over the weekend in his latest Bear Traps Report, Larry McDonald wrote that “we are sitting on an incredibly important turning point” adding that “the world’s first and second most liquid and arguably most important stock indices are sending important rotation signals. In our view, both tech and growth equities outperformance run is over and the rotation to value and commodity exposed equities has begun.”
As Bloomberg notes, while recent single-day rallies (4% on Tuesday and 2.4% on Thursday) lifted the Nasdaq 100 to its first gain in four weeks, they’re not calming nerves. After all, big up days are not uncommon during a downtrend. In 2000, when the market started a three-year crash, the index had 27 sessions where it rose at least 4%. That compared with six such days in 1999 when prices doubled.
“The early stages of a bear market are typically punctuated by ferocious rallies, and what matters, in the end, is how far the rallies extend and not how quickly they move within a single session,” said Michael Shaoul, chief executive officer at Marketfield Asset Management LLC. “Evidence continues to mount that the technology sector has finally relinquished its position as key global leadership.”
That’s raising alarms for anyone who lived through the dot-com crash. Back then, when the Nasdaq 100 started falling in March 2000, the equal-weighted S&P 500 kept marching forward and didn’t peak until 14 months later — a sign that money was being shifted away from the tech behemoths that soared in the internet bubble. By May 2000, the Nasdaq fell 5.6 percent, in a broad technology sell-off led by many of 1999’s best-performing stocks. Ultimately, the Nasdaq lost half of its value.
“People should not take solace in the fact that almost everything else besides the tech group is acting well,” said Matt Maley, chief market strategist at Miller Tabak + Co. “If the tech group continues to underperform, it’s going to weigh on the rest of the stock market eventually.”