The stock market is currently experiencing levels of concentration not seen since the Great Depression, with equity valuations at historically high levels. This has led to concerns about a potential “Concentration” bubble in the stock market that long-term investors should not ignore.
In the first half of 2024, the S&P 500 saw significant gains, but much of this was driven by a few key stocks, leading to a top-heavy market. The Nasdaq-100 ETF has been outpacing the broader market, indicating a concentration of gains in large-cap, tech-heavy stocks.
While mega-cap tech companies have seen significant earnings growth, leading investors to flock to these profitable companies, there are concerns about the sustainability of this growth. A rotation trade from these mega-cap tech stocks to other companies in the S&P-493 may be on the horizon.
The concentration of mega-cap tech stocks in the QQQ ETF has led to fears of a potential bubble in this sector. Technical indicators suggest that a correction may be on the horizon, especially as the market enters a historically weak period for tech stocks.
Overall, investors should be cautious in the current market environment, as the high levels of concentration and elevated valuations could lead to a significant market correction. It’s important to diversify and be prepared for potential market volatility in the coming months. Additionally, the US elections are approaching in November, and there may be increased volatility leading up to the Fall showdown.
It is important to note that previous instances of extreme stock market concentration, similar to what we are currently experiencing, have often resulted in market downturns.
As the year has progressed, a smaller number of stocks have been driving stock market returns in 2024. This trend mirrors the setup described by Stanley Druckenmiller.
While I am not predicting a crash like the one seen in 1987, I do believe there is a non-zero chance of a sudden pullback in QQQ due to the high concentration risk associated with overvalued mega-cap tech stocks. These stocks are expected to face a significant slowdown in earnings growth in the coming quarters.
With recent economic data showing signs of weakness, there is growing anticipation of a rate cut by the Fed. The bond market has already priced in a high probability of a cut at the September FOMC meeting. While an easing of monetary policy may boost asset prices in the short term, investors should be prepared for potential turbulence.
In conclusion, I recommend selling QQQ at its current levels from a tactical standpoint.
Remember, investing can help you build wealth, but effective risk management is essential to preserving that wealth.
Thank you for reading, and happy investing. If you have any thoughts, questions, or concerns, please feel free to reach out.