MorningWord 10/21/13: When I started in this business in the mid to late 1990s the notion of getting a “double” in a stock was something that the old timers told me told me could be achieved every so often, with a little patience. (stocks yes, indices every generation) Then the really late 1990s came and stocks began doubling, and then redoubling, and so too with the indices.
History proved that this was not healthy behavior, or sustainable for that matter, but it was certainly fun while it lasted. Tech stocks were in full blown mania mode in 1999 and while some of the smartest investment professionals I knew were sure it wouldn’t last, they still rode the wave, since selling on the way up could have been very hazardous to one’s financial health.
Flash forward to Friday’s close, with the S&P 500 and the Russell 2000 closing at all time highs. It is important to note (although I am sure most who were trading in 2000 will never forget) that the tech heavy Nasdaq still sits 23% below the March 2000 high. When you look at the chart of the Nasdaq Composite from 1995 it is truly amazing to see how the index doubled from 1996 to 1998, then doubled again from 1998 to 2000 and then rallied 25% for the final blow off top for shits and giggles in a matter of months in early 2000.
Looking at the chart above, it’s fairly shocking that we are now getting back to levels last seen when tech bellweathers like CSCO, DELL, INTC & MSFT were powering the large part of the gains in 1999/2000, while upstart tech stocks like AMZN, EBAY, PCLN & YHOO were capturing all the headlines because of their ability to seemingly double on a quarterly basis. In a lot of ways things feel fairly similar now. The top 7 weighted stocks in the Nasdaq 100 (all tech stocks) are AAPL, MSFT, GOOG, AMZN, CSCCO, INTC & QCOM and account for 40% of the weight of the entire index. Here is the thing that really sticks out though – the QQQ is up 27.42% on the year, yet the average return of those top 7 names is only about 20%. But capturing a good bit of the headlines are the fabulous ytd gains in stocks like FB up 103% ytd, TSLA up 441% ytd, LNKD up 117% ytd and NFLX up 260% ytd. Sound familiar?
Granted, this market is a bit different than the late 90’s in that the move higher in stocks has actually been more correlated this time around, whereas the late 90’s were mostly a pure tech story. Whether that’s a sign of health or froth is yet to be determined. Perhaps more amazing is that the S&P 500 has advanced from 666 to 1745 in the past 4.5 years, while the S&P 500 index advanced from 666 to 1550 from early 1996 to late 2000. Meanwhile, from 1997 to 2000, the VIX never fell below 15, while the VIX has spent much of the past 2 years below 15.
So some of the charts look similar, but the broad behavior is much different. But when I see 1 day moves of 8+% in names as diverse as QIHU, FSLR, CMG and GOOG, it tells me that momentum is clearly in the driver’s seat. The real question is whether the wave still has a good bit of rise left in it, or whether it’s close to cresting.