Is This The Next Dot-Com Bust?
1.) COMPARISON - There's a lot of hand-wringing these days, making comparisons to the 2000 dot-com bust and subsequent brutal 2-year bear market that ensued. I get it. It's easy to make a lazy comparison based on how the current circumstances "feel" when compared to the internet bubble. But let's look at some real numbers. The Nasdaq traded at 60× forward Price/Earnings BEFORE the dot-com bust. Today, the Nasdaq's P/E is at 19×. That's the cheapest in 4 years. Sure, whether the earnings hold up is debatable. But from the way it looks right now, this is more of a fear-driven drawdown, not a fundamentals-driven one. The last time we were at these valuation levels was the bottom of the bear market in 2022. Does that guarantee we're at a bottom now? No...and investor could be either bullish or bearish here and substantiate that position. But remember that positioning matters. If most investors have already deleveraged, another 10% decline would likely require outright panic. Is there a catalyst coming that could provide soothing OR panic...substantiate a bullish or bearish stance? Ya...Nvidia's earnings on the 17th. Of course the news narrative of Nvidia's CEO having an affair with a Chinese spy isn't helping matters.
2.) POSITIONING - Since market participant positioning is so valuable, let's dig into that a bit deeper. Deutsche Bank's positioning indicator shows that equity positioning has plunged to a sizable underweight in one of the sharpest weekly drops on record (-0.54sd, 20th percentile). That's not bearish...it's overloaded one side of the boat - the bearish side. One side of the boat getting too crowded tends to then move in the opposite direction. Bottom line is that last week's selling has aggressively cut investor positioning, reaching levels that are historically quite light after a very sharp weekly drop.
3.) NEXT - The market is overly bearish, so a rally would not be out of the question, especially with the S&P 500 signaling "oversold" on a daily timeframe (red bar show in the chart blow). We haven't seen the S&P 500 in an oversold condition since the late March market correction. But if markets do rally, where might they move to? Good question. For the S&P 500, 7530 is an important level as it is the bottom of trend that broke with last Thursday's drop. Technically speaking, the index moved into a bearish condition on Tuesday, Nov. 3rd when it stayed 3 days below trend range (shaded area). But because of last week's hard drop, the real confirmation will come if the index fails at that 7530, bottom end of trend area. The S&P 500 is still above its 200 day moving average, which has historically been a strong area of support for stocks and indexes. The Nasdaq is below that level. How that index acts around the 25,660 area will also be very telling. The biggest factors that markets are dealing with right now (besides Nvidia's coming earnings) is a deceleration in both growth and inflation against their base effects or quarterly comparisons for Q1 2027. As I've mentioned, the market could be pulling that forward. Can that change? Of course. But because of those base effects, the growth and inflation data would have to accelerate a considerable amount from here.
