Tech stocks flashing a warning similar to before dotcom bubble popped

Investing


A measure comparing riskier tech stocks to safer utilities is triggering memories of what happened just before the dotcom bubble wrecked the market 18 years ago.

Price performance between the two sectors has spread lately to a gap not quite as wide as during the bubble, but close. Using a measure called the “Popular/Panned Ratio”, Jim Paulsen, chief investment strategist at the Leuthold Group, sees danger signs growing for the bull market that began nine years ago.

“Even though its magnitude is less dramatic, the character of the PP Ratio in this bull market is amazingly similar to what occurred during the 1990s,” Paulsen said in a note to clients. “The obsession with dot-com stocks in the late-1990s has been replaced today by a fascination with FANG stocks.” FANG stocks entail Facebook, Amazon, Netflix and Google-parent Alphabet.

While the performance gap between the two sectors stayed flat during the early years of the bull run, it has expanded since 2016 and has surged in recent months.

“While this does not suggest a massive collapse — similar to the aftermath of the dot-com era — is forthcoming, it is another reminder that the character of the current bull market has changed,” Paulsen said.

Utility shares are down about 5.5 percent year to date, while tech has been the market’s best performer, up nearly 7 percent. Essentially, the sector has become a proxy for the greatest risk appetite.

Tech, however, was the worst performer in Monday’s market dip, which saw major averages down 2 percent in afternoon trading.

Paulsen said the ratio can continue to grow before it breaks, but “not much higher and not much longer.”

Though historically bullish, Paulsen has been more cautious on the market this year due to concerns over inflation and an overheating economy.

“In the last year, confidence has soared among businesses, consumers, and investors. Caution is increasingly being thrown to the wind and more aggressive behaviors are enhancing the chances of a mishap,” he wrote. “As the PP Ratio jumps, investment risk is becoming concentrated, extended, and increasingly vulnerable to the Bear’s bite.”

WATCH: Paulsen sees a flat market this year.



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