Most people don’t think about what they will do if they lose 50% or 75% of their life’s savings in only a few days. But that’s about to happen…
The mania in tech stocks today far exceeds the 2000 bubble. Going forward, for the next decade or longer, returns on large-cap tech stocks will be well below average. And for investors who pile into tech stocks today, the results will be catastrophic.
This advice is contrary to what virtually everyone else is saying about the stock market right now, so I understand if you’re deeply skeptical of my views.
But I hope you’ll pour a glass of your favorite adult beverage and let me explain why your actions over the next three to six months matter so much to your financial well-being.
You see, while stocks do well on average and over time, those averages hide an important reality: There are great times to be a buyer of stocks, and there are terrible times to be a buyer of stocks.
Right now has all of the hallmarks of a terrible time to be a buyer of most stocks – but especially tech stocks…
You’re probably wondering how I know…
First, stocks as a percentage of household assets are at an all-time high of 35%. Previous peaks include the top of the ’68 bull market (29%), the top of the 2000 bull market (30%), and the top in stocks just before the pandemic (34%).
Bear markets bottom when everyone has sold. Bull markets die when everyone has bought. Mid-June saw the largest weekly inflow to tech-centric mutual funds in history.
And who is selling? Insiders at Nvidia (NVDA) have been selling at the fastest pace ever, dumping almost $500 million worth of shares in June.
A second critical factor also tells us the current market is extremely unstable and subject to a crash… The market today is more concentrated than ever before.
The top 10 stocks in the S&P 500 Index now equal roughly 35% of the entire index’s value. The only other time the market was even close to this level of concentration was during the Great Depression.
This suggests that the real economy is much weaker than anyone realizes – mostly because investors have pushed valuations of the biggest stocks to incredible extremes.
Finally, the stock market is suffering from a growing lack of “leadership.”
For example, on June 17, the S&P 500 set a new all-time high (though not the last). That’s a sign of a strong bull market.
But on that same day, more stocks were at new 52-week lows than at new 52-week highs.
This is an extremely unusual “divergence.” And it’s just another example of how a small group of vastly overvalued stocks has pushed an otherwise weak market higher. The reality is, the market has no foundation. When sentiment changes, there will be a crash.
The last time we saw this kind of divergence in the market was just before it began a 22% decline in January 2022. And there were only two other instances…
One was before a sharp 20% decline in late 2018 – the “crypto crash.” The other was in January 2000… right before the huge 50% decline in stocks when the first tech bubble burst.
Now, does this mean that stocks will collapse next week?
We’ve already seen a decline in recent weeks. Regardless, I believe the market is “broken”…
The extreme amount of capital that’s “indexed” – and the enormous size and valuation of the biggest tech names – shows the stock market is not functioning normally.
Already, the Big Tech names have dropped earlier this month, led by market darling Nvidia. The stock is now down 17% since July 10. It’s not often that the market confirms a thesis so dramatically, literally while you’re writing the research, but I believe that’s the case here.
I think the “top” is in for big-cap tech…
Extremely high valuations, like the kind we see today in big-cap tech stocks, are like someone putting dynamite into a hole. The pressure builds and builds and builds. And the more extreme the valuations get, the bigger the inevitable explosion will be.
Right now, the only thing holding up this market is sentiment – the fundamentals are completely broken. When the stocks start to fall, sentiment will disappear. And the crash will be catastrophic.
When stocks are trading at extreme valuations, any bump in the road can lead to immense carnage.
If you know a great white shark is in the water, do you need to know exactly where he is to know that swimming probably isn’t smart?
So, what should you do?
I’ve got three sensible solutions…
First, I highly recommend… no, I am begging you… to use a well-thought-out exit strategy with trailing stops and risk-based position sizing. You need to understand, measure, and limit the risks you’re taking in stocks today.
It might sound simple. But I guarantee you, the majority of investors are not taking this step today – and they will almost certainly regret it.
Second, make sure that you haven’t inadvertently let stocks grow to be too much of your portfolio. If you’re 80 years old and you’re 100% in stocks, this would be an important time to rebalance.
Please hear me, though: I am not saying you should sell every stock. Particularly if you own strong, dividend-paying stocks, you may have sound reasons not to sell them even if they decline in price.
Third, look at your portfolio and rebalance toward value. This is an unusually bifurcated market that’s eerily similar to 1999 or 2000… when value stocks became incredibly cheap, while tech stocks became insanely overvalued.
That’s why now may be a good time to look for high-quality, iconic stocks trading at low valuations rather than buying up overheated tech stocks.
While these stocks are out of favor and trading at near-record-low valuations today, over the next three to five years, we expect all of these businesses to perform well… and, sooner or later, to once again be revered by investors.
In short, tread carefully in today’s market. Put this advice to use to protect and build your wealth in the years to come.
Regards,
Porter Stansberry
Strange change at your bank [sponsor]At least 41 major US banks have just made a drastic change to the way money in America works. It could have some major implications for you, your money and your retirement. But it's crucial you understand what's happening, before these changes get applied to your bank account. Here's everything you need to know.
Source: Daily Wealth