Posted Aug 27, 2020
We are watching the US Stock Market indices rising dramatically in the last few weeks, with Tech Stock Prices leading the charge upwards. We are almost back to March 2020 levels. This Bull Market has been fueled by dramatic rise in stocks of Tech Titans like Amazon, Tesla, Apple, Facebook, Twitter to name the notable few. In fact, Tesla’s stock has been on a tear since March and is now up ~600% leading to a humorous remark making the rounds “Tesla Bears – stay in your caves” which aptly sums up this irrational exuberance sentiment.
Consequently, in social media discussions with friends, peers and associates, we have been advising caution that this bull run is expected to take a pause or worse “correct” in the coming weeks – see picture below containing one of my social media posts on Aug 22, 2020:
We believe that this this “bull market” may be attributed to some of the following reasons:
- New Zero Commission Fractional Share Purchase Platform “Robin Hood” has become very popular with Millennials and Gen Z “Newbie Investors”, since fractional shares of large companies can be purchased commission free for small amounts like $50. Seeing this trend, other big stock trading platforms like Schwab and others have also started offering this option. It has been reported that a few million new accounts have been created. These “Newbie Investors” generally trade only on the “Long side” and do not “trade on margin”. They are very enthusiastic about the “New Tech” companies like Tesla (TSLA), Apple (AAPL), Amazon (AMZN) and their Bullish sentiment is reflected by very high volume of purchases fueling the rise of their stock prices
- There are also reports circulating that many of these Millennials and Gen Z folks are “bored”, during this pandemic shutdowns with no sports, and are using this ‘down time’ to follow trade stock using recommendations from their social media “influencers”. It appears that they are using their “Stimulus Check” payments to “day trade” stock on these Zero Commission fractional share trading platforms contributing to this Volatility
- We are observing a “Gold Rush” of Software company IPOs, which are being oversubscribed, causing sky high valuations contributing to this bull run
- We see the emergence of a new investment vehicle viz. Special Purpose Acquisition Company (SPAC) also know as “blank-check company”. SPAC is a shell company that has no operations but plans to go public with the intention of acquiring or merging with a company utilizing the proceeds of the SPAC’s initial public offering (IPO) which is adding to the Bullish outlook
- We are also noticing stock splits 4 for 1 and 5 for 1 for Apple, Amazon, Tesla to attract more “retail” and “Robin Hood” Investors. This reminds me of the heady days of early 2000 with similar stock splits for great e-Commerce “Tech Titans” like CMRC (Commerce One) and ARBA (Ariba) who disappeared in the 2000s. I will admit I made a few $$ “day trading” in those momentum names viz. CMRC & ARBA, but we knew they were overvalued and unsustainable, and I did not hold onto my “long” positions on these stocks for long.
We recognize that companies like Apple, Tesla and Amazon provide good products and are profitable now, but are these sky high P/E valuation? Hence, it is our opinion that all the above factors are contributing to this “Stock Market Bubble” and history could be repeating itself like the Tech Bubble of circa 2000.
Furthermore, in our opinion, these P/E valuation and stock prices are not sustainable and this market appears due for a correction. We wish to be wrong and these stock prices stay at these levels at least so that new retail investors on the “long” side of these trades do not get hurt financially.