Tech stocks will start to crash when the marginal buyer decides to get out. I'll tell you a little bit about that marginal buyer. He is an institutional value investor who feels he has to be in the big tech names or "risk underperforming", though he knows full well the risk he is taking. And he is telling his clients he is taking little risk in an overvalued market.
Then the next group of investors will sell. These are the guys who will sell when price momentum slows down a little bit (i.e. they only go up 2% in a week).
With that many sellers, now the prices start to fall, which is the signal for a whole bunch of other holders to sell. These are the guys who, when they want to sell, they dump regardless of price. At this point, we are down about 15% in the Nasdaq index (read: the price two weeks ago, and a panic ensues when the individual investors start to say "This isn't fun anymore."
This could happen over three months or it could happen over three hours. But what I am not going to do is let the behavior of these "investors" affect my analysis. If they're gonna buy Cisco regardless of price, let them buy Cisco regardless of price. The point of my previous post is that rising interest rates lower Cisco's intrinsic value. Paul points out that that may not change what some idiot is going to pay at the peak, but it will reduce the level where true investors step in to buy the stock when it crashes. Real investors (i.e. those who care about the price they pay) have no role in deciding where a stock (or a market) tops, but they sure do have a role in deciding where it bottoms.
The Nasdaq 100 index of the biggest 100 Nasdaq stocks traded at 120 in October, and that was hardly a panic. I considered it significantly overvalued then. Now it trades at 180. How hard is it to take an index down to the level it traded at less than three months ago? That would be a 33% "correction" in the Nasdaq. CNBC doesn't call that a correction, they call that a bear market. I call that what I'd call 100 lawyers chained to the bottom of the ocean with the fish. A nice start. And if anyone on the thread takes offense to that metaphor, I apologize to fish everywhere.
This should be fun to watch when it happens. |
