Tech Alarm Bells Ringing

In case you missed it, tech is hot right now.

And whenever a stock or an asset class is ‘hot’, investors chase it, hoping for more of the same.

As a result, you’re seeing funds flow into tech ETFs in a big way. As reported by Valuewalk:

The success of Apple, Amazon, Alphabet, and Facebook has inspired investors to funnel billions of dollars into tech funds this year putting tech funds on track to be the most popular asset class, as calculated regarding a percentage of assets under management for 2017. These figures come from Bank of America’s latest Flow Show report, which reveals that year-to-date inflows into tech funds are on track to hit a record 18% of assets under management for the year, with tech ETFs the hot among fund vehicles.

ETFs are ‘exchange traded funds’. They’re like a managed fund, only traded on a stock exchange. In most cases ETFs are ‘passively’ managed. This means stocks are weighted based on their size relative to the index, not on the discretion of a fund manager.

If you’re concerned about tech stocks being overvalued, then you probably wouldn’t buy a tech ETF. But, clearly, investors aren’t concerned about that. They’re more worried about missing out on the ongoing tech bull market.

This is the sort of behaviour that makes me think we’re close to a decent sized correction for tech stocks.

Let’s discuss that…

Firstly, the key words in that statement are ‘I think’. Just because I think something, doesn’t make it likely. And there is an element of confirmation bias in choosing the quote above.

I noticed it because I’ve been mulling the prospect of a decent correction in the tech-heavy NASDAQ index for a while now. And as the article is something that reinforces that belief, you can see why I gravitated towards it.

You Need the Market to Agree with You

There’s a lesson there. Whatever your view of markets — bullish or bearish — there will be an article out there to confirm your view. As long as the article is backed by data, it’s worth thinking about.

But you have to keep in mind its only one data point amongst thousands. Just because it confirms your viewpoint doesn’t make it any more or less relevant.

And this is where the charts come into it. Whatever you think, no matter how much you believe it to be true, you need to test it against the charts.

After all, if you want to make money, you need the market to agree with you. Investors often ignore this crucial point. So I’ll repeat it:

If you want to make money, you need to market to agree with you.

In this example, one in which ‘I think’ the NASDAQ may be setting up for a decent correction, I need to see whether the market (that is, the chart) is showing any signs of topping out.

Let’s have a look…

Source: Optuma
[Click to enlarge]

What’s it telling you?

Put simply, it looks like a textbook bullish advance. There is really no evidence that the NASDAQ is setting up for a correction here. The index continues to break out to new all-times highs, and the corrections are shallow.

In other words, you’d be foolish to bet against the NASDAQ here. Sure, you might get lucky and pick the top. The problem with doing this though is that you would mistake that luck for your own genius, and you’d pay for it down the track.

You’re far better off waiting for an indication of a change in trend, or an exhaustion of the upward trend.

For that to happen, you at least want to see the index move back through the prior lows, marked by the green line.

If that doesn’t happen, and the NASDAQ instead keeps moving higher, then you’ll know I’m way off in my ‘correction’ forecast. And to be way off is to be wrong.

Tech Stocks Hype

Still, the hype around the tech stocks, evidenced by the strong fund flows into the sector, has me cautious. I wouldn’t put new money into the sector now.

It’s well known that the driving force behind the NASDAQ rally is the big tech stocks — Amazon, Facebook, Apple, Netflix and Alphabet (Google).

Given the hype around Amazon, it’s a chart I keep a close eye on. And while it’s too early to say, the chart does look a little fragile. Check it out:

Source: Optuma
[Click to enlarge]

Granted, the upward trend still looks pretty strong.

But what’s interesting is that the recent spike higher to new all-time highs met with a wall of selling. From memory, that was when Amazon released its quarterly results. Clearly the market was disappointed.

Like lemmings, investors bought into the stock just ahead of the release, expecting more good news. But that didn’t happen. It will be interesting to see how it performs from here.

Are investors in for the long run, or just hanging around to make a very quick buck?

Amazon is the poster stock for this tech stock rally. It could also be the stock that leads the NASDAQ down. I’ll continue to keep an eye on it for you. I’ll let you know if it has a turn for the worse.


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia