Calling a Top in Tech
No, not me, David Einhorn is making that call. He is the head of Greenlight Capital Management, an extremely successful hedge fund that is perhaps best known for its bearish (and correct) call on Lehman Brothers right before it blew up in the Global Financial Crisis.
Einhorn contends that we are in the midst of an enormous tech bubble which has now popped. As such he is adjusting his firm’s portfolio to take advantage of this view. He even goes on to relay a story about receiving a job application from a 13 year old who says that he as quadrupled his money since February as a sign of the times we are in. I admire that, shooters shoot and this kid is clearly a shooter!
Now, to be fair, he made the same bubble call in 2016 when he publicly announced that he was betting against names and like Tesla and Amazon…did not work out so well. He also pointed out that this time he is betting against second-tier companies and “recent IPOs trading at remarkable valuations.” Ok, so is that a bet against technology specifically or against certain companies in the technology sector?
I have already been asked a few times for my thoughts on this “top call” and here is what I have to say about. David may be right, but he may be wrong…helpful? No! Truthful? Yes! The simple fact is, I have no idea, and here is the dirty little secret, neither does he. Neither does anyone. No one has the crystal ball. Believe me, if I did, i would not be working or writing this…I would be on Marea Island, which I would own. If I had that crystal ball, I certainly would not tell anyone about it!
Are there signs of froth? Yes, of course there are. There are companies that are going public at extremely high valuations that aren’t profitable. And I don’t care what the “this time is different” crowd says, SPACs are something you see when we are closer to a market top than a market bottom. Yes, some companies will prove to be the exception but for the most part, high quality companies and management teams don’t go public via a SPAC. Read about SPACs here. Also, remember what I said yesterday about the savage marketing message from ARK? They invest in innovation. When I hear the word innovation, I think of technology. That savage commercial could come back to bite them.
Here is what the Technology Sector of the S&P 500 looks like. We can see that September was A high, it remains to be seen if it was THE high. To me, it is not a top until those lows in September are broken, call it near $110.
The bigger question is, what does this mean for the overall US equity market? The Technology sector makes up roughly 25% of the stock market. And I would argue it’s actually higher if you consider that medical device companies are actually technology companies but are classified as Health Care stocks. My point is, if you are calling a top in Technology, you are likely calling a top on the equity market. See the similarities? To me, that would be the right call if the S&P 500 breaks 3,200.
One more thing. I am not David Einhorn! I do not not have his timeframe, risk profile or investor base. The same goes for anyone who is reading this. I actually added to some of the stocks that I hold yesterday. They were all in the Technology space. I don’t know if I am going to be right, but I just laid out where I am wrong.
Speaking of being wrong, I wrote about where the market could be wrong on October 12th here. I discussed how investors were positioning for a “blue wave” and were looking for volatility to decline. I highlighted how this seemed to be the consensus view. What we are seeing in the market over the past few days is a recognition that that view could be wrong. It is playing out as the betting markets show the “price” on the President is ticking higher, it’s slight but is higher. Add in rising COVID cases and restrictions in Europe, and we have the one thing the market hates…major uncertainty! We fell more than 3% yesterday.
I have been trading around some VXX call options since I wrote that note, betting that volatility would go up since everyone thought it would go down. That helped off set some losses on my stock positions over the past few days. I have begun to take them off as the market has fallen and volatility has spiked.
Now I am content to sit back and see how this all plays out. There are some big earnings reports coming out this week and then next Tuesday is the main event!